The operating profitability of India’s mobile operators, including Airtel, Idea, Vodafone, Tata Teleservices and Sistema Shyam Teleservices, are expected to improve by 5% in the next two years, according to credit rating agency Crisil.
The firm explained that the improvement will be driven by reduced intensity in competition, improved pricing power and increasing revenue from value-added services such as data and 3G.
Higher cash flows from operations, coupled with lower capital expenditure will enable the telecom operators to reduce their debt and leverage over the medium term. However, uncertainties posed by an evolving regulatory framework will remain a key credit monitorable for the sector, the rating agency stated.
“The regulatory environment, a key element in the assessment of business risk profile, remains uncertain for mobile telecom players. Critical outstanding issues pertain primarily to spectrum pricing and allocation. Any adverse changes in regulations may lead to higher than anticipated cash outflows for players, although the quantum and timing of outflows are still unclear,” Crisil Head Sudip Sural said.
Crisil-rated players account for 70% of the nearly $40.6 billion debt outstanding in the mobile telecom sector at the end of 2011, the agency stated.
“We estimate the operating profits of our large-rated players to improve by up to 300 [basis points] (3%), aided by future hikes in tariffs. The margins will improve further by up to 200 bps (2%) over the medium term on account of increasing revenue from data, 3G and other value-added services,” Crisil Ratings director Pawan Agrawal said.
“The contribution of value-added services to revenues is projected to increase to nearly 18% from 11% currently,” Agrawal added.
Commenting on the recent Supreme Court of India’s verdict in the 2G case, Crisil stated that the competitive intensity in the sector began to come down in mid-2011, as the large players hiked tariffs in select circles, which will be further enhanced with the recent cancellation of the 122 2G licenses.
The rating agency stated that it expects a 30% reduction over the medium term in the average capex of large Crisil-rated players, compared to the capex undertaken in the past three years. This is because most of these players have already achieved high population coverage and have outsourced a large parts of their passive infrastructure requirements.
“The gearing for these players is therefore expected to reduce to less than 1 time by March 31, 2014, from an estimated 1.5 times as on March 31, 2012,” Agrawal explained.