Global ratings agency Fitch has said that recent decisions made by India’s telecom commission will be detrimental to the sector’s credit profile.
The decisions the ratings agency refers to include the imposition of a one-time charge on excess wireless spectrum, higher-than-expected license fees, delinking spectrum from license fees and allowing spectrum-sharing. However, a relaxation of merger and acquisition rules will allow much-needed consolidation to occur, Fitch stated.
Most of the measures, reported in the Indian press, broadly follow the recommendations of the Telecom Regulatory Authority of India. Fitch believes that they are likely to “hurt Indian telcos, especially the larger players. One-off fees for the big three telcos on spectrum in excess of 6.2MHz, for example, are expected to result in significant cash outflows, which will weigh on their already weak balance sheets.”
“A flat annual 8% revenue share license fee is 2% higher than originally proposed by the regulator and also includes tower companies’ revenue. The original proposal of 6% would have represented an improvement for telcos in total — at present the revenue share varies on a number of factors, such as service and region,” Fitch said.
The agency stated that allowing spectrum-sharing is positive and will reduce capital investment but, coupled with VoIP and delinking spectrum from license, brings the risk of more competition, mainly from Broadband Wireless Access spectrum holders.
On the positive side, Fitch stated that relaxed merger and acquisition rules will help the telecom sector’s development.
“Most mobile markets struggle to support more than four players — at the moment India has over a dozen, with only the top four companies achieving solid profitability, while most others have operating losses. The new rules will automatically grant approval to deals that allow market share of up to 35%; and deals up to 60% will be considered. It also allows spectrum to be acquired in an acquisition so long as no one player’s share exceeds 25%,” Fitch stated.
The agency also stated that foreign telecom companies like Etisalat, Telenor and Sistema are among those expected to participate in the consolidation process in the sector.
“This could be either as a buyer or seller, although we think that very small players are unlikely to be high on the list of larger companies’ acquisition targets unless they allow specific weaknesses — such as lack of spectrum in particular areas — to be addressed,” Fitch said.
While terming the overall outlook for the Indian telecom as negative, the agency said consolidation in the sector would be positive for most players as long as it does not lead to a debt-fueled M&A boom.
