Telecom stress: Revenue may decline by 6% in FY18, say analysts

The telecom sector is witnessing protracted strong headwinds with revenue expected to contract 3- 5 per cent this fiscal year due to the ongoing tariff battle between the incumbents and Reliance Jio.

Sector revenues declined by 6 per cent in the third quarter of FY17 compared to the previous quarter sequentially, the biggest ever decline seen by the sector historically. The lowest growth for the sector prior to this had been 4 per cent in FY10, the fiscal year in which Tata launched its GSM services and introduced per second billing.

If this trend continues, the sector could see its revenues decline by 6 per cent next year. Analysts at HSBC Global Research said the sector revenues will decline as the average revenue per user for the mid to high end of the subscriber base with incumbent telcos may get reset to significantly lower levels. “The revenue decline may be bigger for the sector if termination rates were to decline meaningfully, as this may add to the ongoing tariff wars the sector currently faces,” HSBC said.

According sector analysts, 7 out of the 10 operators are in financial trouble and as many as 6 of them could even end up as NPAs if immediate and decisive corrective action is not taken. “Relief should be provided to the telcos with immediate effect. This could be in the form of restructuring of telco loans so that the financial pressure and pain is lowered and is more manageable. Spectrum auction payments, which are payable in instalments over 10 years, could be extended to 18 years,” said an industry representative.

The stress is forcing the sector towards consolidation with a number of smaller operators exiting. For example, Telenor recently announced to sell its operations in India to Airtel. Tata Teleservices, Aircel and Reliance Communications are believed to be in talks for a three-way merger.

Recently, the Secretary of the Department of Telecom JS Deepak had also highlighted the issue.

“Being a highly capital intensive sector, there is a continuous need to invest in network upgradation and roll-out to provide adequate quality of services both in rural and urban areas. Inability to service debt or meet its repayment obligations can further affect the investment and growth of the industry,” Deepak wrote in the note to TRAI.

“Further, the large exposure of banks and financial institutions to the telecom sector, slowdown in growth and potential defaults by telecom companies...can have serious impact on the banking sector as well,” he added.

According to one industry estimate, the revenues of most operators including Vodafone, Idea Cellular and Reliance Communications could decline anywhere between 1 per cent and 11 per cent. Only Bharti Airtel may manage to grow its revenues this fiscal. The overall debt is also expected to grow from ₹3.9 lakh crore to nearly ₹4.5 lakh crore

“With the telecom sector health slated to worsen over the next few quarters, the EBITDA generated by the sector as a whole would get wiped off with the cost of servicing the existing debt,” said a market analyst.

According to an industry insider, the operators may soon seek a relief package as has been done for other sectors such as steel and power. Even as the revenues decline, the industry is faced with large pay outs for spectrum.

In addition, operators pay nearly 30 per cent of their revenues in the form of licence fees and spectrum usage charges.