The unthinkable has just happened. Anil Ambani-led Reliance Communications (RCom) has defaulted on a loan repayment of INR 375 crores. Credit rating agencies, such as Moody’s, Fitch, and Care Ratings, seem to have downgraded the company’s debt.
- Care Ratings, India’s second-largest rating agency, downgraded all types of the company’s debt to “default”, the lowest rating
- Moody’s has cut RCom’s corporate family rating and senior secured bond rating to Caa1 indicating high credit risk
RCom’s financial position is extremely fragile and can be understood by the following facts:
- The total debt outstanding is INR 44,345 crores
- The company reported a loss of INR 966 crores in the Q1 2017
- Interest coverage ratio has fallen to just 1 times
The commercial banks, led by SBI, realizing the gravity of the situation, went into a huddle last week and decided to grant a moratorium of 7 months to Reliance Communications on both interest and principal repayments.
As per Moody’s “Given the weak operating outlook and high competitive intensity of the Indian mobile sector, there is no scope for RCom to deliver, absent the successful execution of its corporate restructuring.”
You might be thinking as to what magic will happen in the next 7 months that will enable RCom to pay back the outstanding debt. Here are a few glimmers of hope:
- Merge Sistema Shyam TeleServices Ltd.’s (SSTL) India wireless business with itself
- Merge its wireless operations with that of the Aircel Group
- Offload its tower business to Brookfield Infrastructure Group
RCom has given a statement to the stock exchanges that the company will repay debt worth INR 25,000 crores by Sept 30, 2017, contingent on the three transactions mentioned above.
Indian Telecom Sector is in a Soup
But the bigger question coming from the RCom saga is about the overall health of the Indian telecom sector. It will not be an exaggeration, if we say that the telecom sector is currently facing turbulent times. The major reason behind the sudden decline in the fortunes of all major telecom companies such as Airtel, Vodafone, and Idea is the entry of Reliance Jio last year. The freebies offered by Jio led to a price war among the telecom companies, and call and data prices have tumbled in the last 6 months, i.e., average price of 1GB of 4G data has reduced from INR 250 to just a miniscule INR 3.
Now let’s us dig deeper into the most important financial numbers and understand what a perfect storm is brewing in the telecom space that can give sleepless nights to Indian banks, which are currently saddled with large amount of bad debts from infrastructure-related sectors such as steel.
|Industry Debt||INR 425,000 crores|
|Industry EBITDA||INR 55,000 crores|
|Interest Outgo||INR 34,000 crores|
|Telcos||EBITDA Share||Debt Share|
|Top 3 (Bharti + Idea + Vodafone)||90%||46%|
The current level of Debt/EBITDA of 7.7x is clearly unsustainable. The problem is magnified because 54% of this debt is taken by lower rung players such as Rcom, which together have just 10% of the overall industry’s EBITDA.
Factors That Fueled this Debt Increase?
This debt increase has been primarily driven by 5 successive spectrum auctions between 2012 and 2016. These auctions had aggressive participation by operators leading to a 3-fold jump from INR 1,23,000 crores in 2009–10. The high debt level is not a problem though; the declining operating profits are.
The profitability is likely to remain under pressure in the near future because of the following reasons:
- Continuous price war due to aggressive tariff packages offered by JIO (backed by Mukesh Ambani)
- Investments in network expansion and quality control to prevent customers from shifting to Jio, i.e., Airtel is spending ~INR 20,000 crores per year under “Project Leap” to upgrade and expand infrastructure
The companies have now started crying out loud to the government for help by creating a hysteria around possible 40,000 job losses in the next 12–18 months. The major demands are as follows:
- Reduce the high incidence of taxation: Approximately 33% revenues compared to 20% in EU, 22% in China, and 17% in the US
- Deferment of payment liability with respect to levies (imposed by telecom department) and spectrum charges by 3 years
- Reduction of license fees to 5% (currently at 8%)
- Flat 1% spectrum levy
- A lower GST rate from the current 18%
It will be interesting to see how the industry cope up with this no holds barred contest to win the most precious commodity of the future: DATA
Large-scale consolidation with the sector being divided between 3 large players – Airtel, Jio, and Vodafone-Idea combine looks a distinct possibility. There were even rumors of Rcom and Tata Tele being acquired by Jio to overtake Idea-Vodafone in terms of spectrum holding and Airtel in terms of total subscribers. The PSU operators MTNL & BSNL will remain to be fringe at best.
It is also very important for the government to be pro-active and ensure that the telecom companies do not add to the miseries of the banking sector. The credit off take of ~5% is already at a 60-year low due to limited capacity of banks crippled by burgeoning NPAs from sectors such as power and steel.
Just four banks – State Bank of India, Bank of Baroda, Punjab National Bank, and Canara Bank – are financially stable. These four lenders have either increased their profit or swung back from a loss reported in the fiscal year ended March 2016
Large-scale defaults by telecom companies might prove to be the last nail in the coffin for a few banks.
Even the finance minister displayed concern recently in an interview to CNBC-TV 18 saying
“I hope telecom is not the new steel”
Author – Vaibhav Aggarwal