Fitch Ratings’ Nitin Soni on telecom sector in India
We have a rating of BBB minus on Bharti Airtel and yesterday we placed it on rating watch negative.
Jio’s recent letter calls out on COAI trying to bail out Airtel, Vodafone which are, it says, shedding crocodile tears claiming financial stress. How badly stressed are these companies and are they likely to be bailed out by COAI’s attempts?
Let us talk about Bharti Airtel first. We have a rating of BBB minus yesterday we placed it on rating watch negative. That essentially reflects the uncertainty on the amount and the timing of these regulatory dues which aggregates $5.9 billion. Out of this, demand for $3 has already been raised by the Department of Telecommunications (DoT) regarding license fee and the balance $2.9 billion is the spectrum usage charges which they have not raised the demand yet. We believe that they will potentially raise the demand. This will lead to their FFO adjusted net leverage to worsen to around 3.1x to 3.4x for FY20 and that is why we have placed it on a rating watch negative. This ratio on the leverage is significantly higher than our threshold of 2.5x, above which we consider a negative rating action.
As for Vodafone-Idea, it has been struggling in terms of retaining its subscriber base. They have been losing about 3 to 5 million subscribers every month to Jio mostly which has been gaining around 8 million subscribers a month. If they were to pay this entire amount of $5.5 billion for Vodafone-Idea, it could cause significant financial stress on their balance sheet, given that they have limited financial flexibility to invest in capex. Their last quarterly EBITDA was only Rs 12 billion which is a fraction of EBITDA of Reliance Jio. Jio’s quarterly EBITDA is about Rs 50 billion, which is four times that of Vodafone-Idea.
When we just talk about the telecom space, what is the sense that you get? There are three players nowDo you think it become a two-player market soon?
It would be quite surprising to see that the Indian market which used to have at one point of time 13-14 industry participants, coming down to only two private telco market. It will be surprising given Vodafone-Idea has been a competitive participant in the market. They are still the leading telco in the market with 375 million subscribers but they are losing fast. It is not for us to say what is going to happen in terms of further sector consolidation, but there could be some sort of relief coming from the government, if the government believes that there is a lot of financial stress happening with some of these telcos. We will have to monitor if the government is interested in giving any relief to the private telcos and how they can provide any financial support to the sector.
What do you make of lot of these noise coming in regarding Reliance Jio’s letter to COAI?
See Reliance Jio obviously has a strong momentum right now to gain subscriber base. They have gained a lot of subscriber base and we expect them to achieve 375 million subscriber base by the end of December and clearly their market execution has been quite strong and in terms of retaining subscriber base, in terms of network strength, in terms of the first telco coming out with VOIP, obviously they will exploit the situation to gain a larger subscriber base at the expense of Vodafone-Idea or any weakness coming from Bharti.
It is natural to see that as a business they would try to execute well in the market to gain from any weakness of the incumbents.