India Ratings and Research (Ind-Ra), a Fitch group company, said the revision of outlook on the sector to negative for 2017-18 from stable-to-negative for 2016-17 is due to "increasing competition".
"The negative outlook reflects Ind-Ra's expectation of longer and deeper than expected deterioration in the credit profile of telcos following the extended free services by Reliance Jio Infocomm," its latest report on corporate outlook said.
The report further said the industry has lost about 20 per cent revenues due to the free services by RJio.
"The existing telcos would lose market share to RJio and suffer profitability while the debt burden will increase due to spectrum and network-related capex (capital expenditure)," the report added.
"A decline in data tariffs by 20-30 per cent will pull down average revenue per user (by 10 per cent, despite higher volumes due to a rise in data usage)," it said.
Reliance Jio launched full-fledged mobile services on September 5, 2016, offering consumers free voice and data. Just days before the 90-day inaugural welcome plan ended on December 3, Jio announced extension of the freebies for existing and new customers under the 'Happy New Year offer'. The incumbent operators have alleged that the Jio's free offer is hurting the industry.
The Ind-Ra report said "free cash flows will be negative due to double whammy of weaker earnings and capex".
The consolidation of both spectrum and market share will be accelerated in 2017-18, given significant competition from Reliance Jio. This could eventually lead to four private sector telcos in India, it added.
"A redistribution of market share among the existing telcos is under way as RJio's subscriber base could cross 100 million by March 2017, but its ability to retain market share would be driven by both pricing and user experience, coupled with the success of VoLTE (voice over LTE) technology," it said.
Telcos, it said, will balance debt levels by monetising non-core assets to mitigate the pressure on credit profiles.