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Indian telecoms sector to consolidate

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Staff writer ▼ | December 12, 2013
In a special report Fitch Ratings revised the outlook on the Indian telecoms sector to Stable from Negative. The agency believes that the industry will continue to consolidate in 2014, which will reduce competition and bring back the pricing power to the major companies.
India mobile phone
India mobile phoneIn a special report Fitch Ratings revised the outlook on the Indian telecoms sector to Stable from Negative. The agency believes that the industry will continue to consolidate in 2014, which will reduce competition and bring back the pricing power to the major companies.


Regulatory risk will ease on cheaper spectrum, greater spectrum supply and relaxation of M&A rules. Consolidation is likely as M&A guidelines are relaxed. Weaker unprofitable telcos will seek to merge to strengthen their positions, being unviable as standalone businesses.

Of the 10 telcos currently in the market, Fitch believes that six at most can operate profitably in the long term. Larger companies could cherry-pick smaller operators to acquire spectrum assets, however this might impair credit metrics if funded by debt.

Cheaper pan-India spectrum and the introduction of a flexible payment mechanism for regulatory payments would reduce regulatory risk. Furthermore, potentially lower spectrum usage charges would mean cost-savings for most Indian telcos. However, spectrum "re-farming" remains a key risk, which if implemented could cause significant cash outflows for the top three telcos.

Top four telcos' funds flow from operations (FFO)-adjusted net leverage will improve on stable profit margins and manageable regulatory-related cash outflows. Operating EBITDA margin will expand by 150 basis points (bp)-200bp to 31%-32% due to a gradual rise in voice tariffs; greater economies of scale in the data segment; and lower marketing costs as the monthly churn rate comes down.

However, weaker private operators will continue to struggle due to higher costs, large capex requirements and weak balance sheets. Nationally-owned telcos will continue to be hurt by high staff costs and low average revenue per user (ARPU).

The average free cash flow (FCF) margin for the top four telcos will remain stable at 4%-5% (FY13: 4.9%), benefitting from an improved EBITDA despite higher capex. Industry capex may rise as growing data traffic will require supporting investment. Indications by the telcos for 2014 capex is much lower relative to revenue than for their Chinese and Indonesian peers despite Indian telcos' low spectrum quantity.


 

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