Indian telcos seeking financial assistance

The Indian telecom sector has experienced severe disruption since the entry of Reliance Jio, whose access to financial markets and internal financial muscle (being part of a diversified conglomerate) have allowed it to undercut incumbents’ pricing and offer 4G feature phones at very low prices to acquire subscribers and boost market share. This has triggered a wave of consolidation as incumbents attempt to strengthen their market positions. Telcos are saddled with debts, declining revenues, and high levies as well as the need for significant CAPEX/OPEX over the coming years to install, upgrade, and maintain network infrastructure. Therefore, realizing their current business models are becoming unsustainable, several operators have requested financial assistance from the government. 

So as to mitigate their financial difficulties, telcos are engaging the government in negotiations to extend the payment period for spectrum purchased to 18 years (with a two-year fallow period and 16 years tenure) against the current 10 years (a two-year halt and eight years tenure). Furthermore, they are seeking a shift to a marginal cost of funds-based lending rate instead of a prime lending rate, as this will reduce interest payments on loans taken to finance purchase of spectrum. Telcos have also requested for a reduction in the spectrum usage charge (a component of telecom levies) and for abolition of the ceiling on the amount of spectrum a telco can hold in an assigned area to be more conducive to their consolidation efforts.  

There are several factors that have contributed to the plight of telcos in India, driving many of them to turn to the government for assistance; intense competition, exorbitant levies, increased capex, and revenues under pressure are among those factors.

The intense competition following earlier liberalization of the industry is a key factor. MTNL, BSNL, Telenor, Aircel, Airtel, Vodafone, Idea, MTS, Reliance Communications and Tata Docomo are the incumbents in the sector. They compete fiercely for subscriber market share through advertising, branding and product diversification. The entry of Jio has been a game changer, with industry pricing being undercut due to predatory and disruptive tactics. This has triggered a wave of consolidation, with Idea and Vodafone merging as well as Airtel and Telenor combining into a single entity for example. 

In addition, total telecom levies(including license fees, spectrum usage charges, service taxes) paid on revenue by telcos to the government have been as high as 30%, which is significantly higher than in other markets. Telcos have also become highly-leveraged entities, with total outstanding debt exceeding US$75.8 Billion. In addition, US$46.9 Billion is owed to the government as deferred payments/installments for spectrum purchased. Much of this debt is in the form of loans taken from public and private sector banks, and also funded through the issuance of fixed-coupon bonds in domestic and international markets. Many of the bank loans are of short tenure, typically in the 5-year range, pressurizing telcos into full repayment in short periods of time. Public sector banks have seen a sharp increase in non-performing loans nationwide and have demonstrated some reluctance in extending the tenure of these loans, demanding full repayment.  

Capital expenditure has been rising for telcos, driven not only by spectrum purchases but also by the need to provide more coverage in rural India. Concerted efforts have been made to drive subscriber migration from prepaid (95% of the base) to postpaid. Efforts are ongoing to migrate subscribers from 2G (75% of the base) toward 3G and 4G. Technology upgrades and subscriber dynamics are evolving in favor of greater data consumption, placing India in top place in terms of smartphone adoption rates over the coming years. In line with these trends, significant expenses are being incurred to install, upgrade and maintain base stations. This has driven some operators to turn to tower management companies to offload base station assets to generate funding and rent out space for antenna equipment on towers, essentially entering into sale and leaseback agreements.

Revenues are under pressureas price competition has caused Average Revenue Per User (ARPU) to plummet. According to the CLSA, the total revenue of Indian telcos in the financial year ending 31 March 2017 decreased to US$ 29.3 Billion from US$ 30.1 Billion in the previous year. This decline has been attributed to the entry of Jio into the market and its pricing tactics.

Clearly, the telecom sector is extremely significant and is a strategic priority for the government. It remains in national interests to ensure telecom infrastructure and services are largely in line with developed standards, as India seeks to attract investment and drive economic growth and development. According to the GSMA, the telecom sector constituted 6.5% of India's GDP in 2015 or about US$140 billion, and supported employment for over 2.2 million people. GSMA predicts that the Indian telecom sector will contribute US$230 billion to GDP, and support 3 million direct jobs and 2 million indirect jobs by 2020.

Therefore, given the economic significance of the telecom sector as well as the national priorities of the government, and considering the exposure of state owned banks to telecom companies, the government will very likely consider requests from telcos for financial assistance. If risks in the telco sector are not mitigated, they may spill over into the banking sector as default risks. Ultimately, the government may need to review the current rate of levies, at 30% the levies imposed on telco revenues are very high compared to around 5% in other Asia-Pacific nations. Further consolidation by Indian telcos is likely to generate cost savings through rationalization. Concurrently, some Indian telcos may benefit from exploring initiatives such as process automation to drive operational efficiency, enabling further cost savings. Telcos may also boost their revenues by offering higher value services to the enterprise segment, through the sale of cloud, data analytics and IoT solutions.