The heightened financial risk associated with the large unpaid adjusted gross revenue (AGR)-related dues in the telecom sector has prompted Fitch Ratings to keep ‘Negative’ outlook on the sector for the year 2020.
The tariff hike by telecom operators and a two-year moratorium on payment of spectrum dues, though positive for the industry, but may not be sufficient to offset the impact of the recent Supreme Court judgement for incumbents Bharti Airtel and Vodafone Idea
, Fitch Ratings said in a report.
The rating agency believes that the government’s plan to suspend the payment
of deferred spectrum dues for two years will ease cash flow pressure on all three telcos.
"Vodafone Idea and Bharti will benefit the most as their negative free cash flow will reduce by $1.7 billion and $850 million a year, respectively, for FY21 and FY22," Fitch said.
Further, the Supreme Court ruled against the telcos in a 14-year old dispute on the definition of adjusted gross revenue (AGR) on which the incumbent operators must pay hefty dues to the government.
"Reliance Jio (Jio), a subsidiary of Reliance Industries Ltd is not affected by the ruling and is likely to continue to gain revenue market share, which will support RIL's deleveraging plans," the report added.
Despite the tariff hike, Fitch still believes it will take negative rating action on Bharti if it pays the AGR dues within three months and funds the payments entirely by debt.
"This is because Bharti's FFO adjusted net leverage will then deteriorate to around 3.0x-3.3x in FY20 - significantly higher than the threshold of 2.5x, above which we would take negative rating action. We will resolve the Rating Watch Negative on Bharti's ratings once we have greater clarity on the timing and financial impact of the regulatory dues and any remedial measures," the rating agency added.
Meanwhile, Fitch expects Vodafone Idea to continue to struggle to improve its EBITDA amid fierce competition, limited financial flexibility to invest and a shrinking subscriber base.
Jio’s Average Revenue Per User (ARPU) per month is unsustainably low in India at about Rs 120 ($1.7) - one of the cheapest in the world, it said.
Assuming a 10% tariff hike, we estimate the revenues of Bharti and Vodafone Idea to each increase by $400 million-500 million, while EBITDA would grow by $200 million-250 million.
Jio is likely to benefit more from the tariff hikes as it is rapidly gaining market share, and is on its way to achieving at least 400 million subscribers and around 40% of industry revenue by H2FY20, the report added.
The benefits from the tariff hike and two-year moratorium of spectrum payments should help RIL further deleverage towards 1.5x net adjusted debt/operating EBITDAR, the level below which Fitch would consider positive rating action. The company's Standalone Credit Profile is 'bbb' and its Long-Term Foreign-Currency IDR of 'BBB-' is constrained by India's Country Ceiling of 'BBB-'.
Disclosure: Reliance Industries, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com