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Dicey ride ahead as debt spikes for the Indian telecom sector

Dicey ride ahead as debt spikes for the Indian telecom sector

By Parnika Jhunjhunwala

In September 2016, Reliance Jio launched its 4G services with ground breaking tariffs to collect a larger subscriber base and revenue market share. Reliance Jio exacerbated the pressure on both revenue growth and profitability of existing operators. The market penetration pricing strategy has led Jio to retain about two-thirds of its initial customer base successfully. It has allowed Jio to also relook at their pricing and customer acquisition strategies.

The company also bid aggressively in the spectrum auctions in October 2017. With bids worth Rs 65800 crores, Indian telecom operators were among the highest leveraged in the region. The Economic Survey 2016-17, Volume II, mentions, “The share of the Telecom sector in Non Performing Assets(NPAs) has now increased to 8.7% in 2016-17 from 5% in 2015-16.”

Pressures of the piling debt

The price war waged by Jio has increased the intensity of competition. As a result, prices and tariffs continue to be under pressure. A rise in the capital expenditure (CapEx) also puts the earnings of the sector at risk. Companies are unable to earn their cost of capital due to continuous investments in spectrum purchases. The earnings before interest, tax, depreciation, and amortization have collapsed and are projected to remain under pressure in the next fiscal year. The telecom sector has a debt of nearly Rs 5 lakh crore. The banking sector, which pegs the debt at Rs. 7.29 lakh crore, is worried that further competition will lead to loan defaults.

The Economic Survey also mentions that since the third quarter of 2016-2017, the telecom sector’s interest coverage ratio has fallen below 1. The fall in the interest coverage rate raises a question on the solvency of firms. The telecom sector’s piling debt will raise the fiscal deficit of India from 3.24% to 3.35%, according to Care Ratings Agency.

Passageways to a great escape?

The government and the RBI have taken measures to curb the menace of rising debt. The RBI has imposed higher provisioning by banks for the stressed sectors, including the telecom sector. The government is also considering extending longer tenure loans to 10 to 20 years instead of the current 5-year variety to the telecom industry. It will ease repayments as a telco takes at least 6 years to start generating cash flows. The interest rates might also be reduced which will further ease the burden. Other relief measures include allowing spectrum to be pledged as collateral for taking loans.

Another way out is consolidation within the industry. Vodafone India and Idea Cellular have decided to merge, and so have Reliance Communications, MTS and Aircel to better fight competition. Mergers may be beneficial to the consumers only in the short-run. According to a Global System for Mobile Communication Association report, the telecom industry employs 2.2 million people. Consolidation in the sector could cause 30% job loss in the next 12-18 months, threatening at least 1 million jobs.

Incorporating formulae to heal stress

The government plans to auction stressed assets for the strong Public Sector Undertaking (PSUs) to alleviate bad debts in the power and steel sectors. It will thus create a win-win situation for both banks (as they are relieved of their bad debts) and PSUs (as they can undertake expansion). A similar model can be adopted in the telecom sector, where big players can help reduce NPAs of banks.

Moreover, given the current scenario, Asset Reconstruction Companies (ARCs) can be introduced in the telecom sector. They will handle the sector’s NPAs and reduce the burden for the RBI. ARCs are companies which buy distressed assets from firms for a management fee and sell it to relieve their debts.

Experts also believe that banks should conduct a robust risk assessment of companies before lending loans. Carriers have requested the government to cut down license fees, Spectrum Usage Charge (SUC) and defer payments of spectrum over 20 years.

The risk is worth the reward

The Indian telecom industry is at a critical position. Speedy improvement in profitability and revenue generation is crucial for the long-term health and growth of the sector. The government intervention to relax loan repayment and timeline can boost repayment, especially now when mergers between major players are consolidating their capital and revenue structure. Even though the certainty of such a possibility is questionable, it is worth giving a try. With the correct government policies and the private sector’s support, the telecom sector can be revitalised. The investment is huge and risky. However, if successful, the risk will be worth the gain.

Featured Source Image: Flickr

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