Weakening rupee, hardening diesel price to make telcos sweat this year

Telecom companies are under pressure, with the rupee’s fall and rise in diesel prices over the past two months. They are expected to wipe off almost a tenth of their earnings in 2018-19.

Further eroding the margins of the older majors would be Reliance Jio’s continued pricing pressure, say analysts. Bharti Airtel (India) and Vodafone Idea (ex-Vodafone) are  expected to report a 17 and 26 per cent revenue slump, respectively, on a year-on-year basis. The outlook for the December quarter (the third one or Q3 in FY19) seems worse, after factoring in the impact of rupee depreciation and rising diesel prices.

Airtel reported net debt of Rs1.02 trillion in the June quarter. Vodafone and Idea had a combined debt of Rs1.09 trillion, with a significant foreign currency component.

Kotak Equities reports weak earnings expectation from the telcos due to the ongoing pricing pressure weighing on their average revenue per user (Arpu).  Rohit Chordia, research analyst at the brokerage, says Q2 earnings will be under pressure due to the incumbents pushing to preserve their postpaid user base, as well as the impact from Jio’s August offers. Airtel’s India wireless revenue would take a hit of around three per cent and Vodafone Idea’s by 5.7 per cent on a sequential basis.

Ratings agency Icra estimates the combined impact of rupee depreciation and rise in diesel prices at 10 per cent of the combined operating earnings or Ebitda (earnings before interest, taxes, depreciation and amortisation) for FY19, given the sector’s sizable foreign currency liability and diesel consumption at network sites. 

“Not only would this increase the outgo (expense) in terms of foreign currency debt repayments and to forex creditors for capital expenditure (capex). It will also increase the capex for network rollout and technology upgradation, given that a sizable portion of the equipment is imported,” says Harsh Jagnani, vice-president, corporate ratings, at Icra. 

He estimates the rupee’s fall against the dollar during the financial year till now could increase the cash outgo by around Rs40 billion or 7-8 per cent of the estimated Ebitda for the industry.

Of the sector’s total estimated debt of Rs4,700 billion as on end-March  2018, the foreign debt is thought to be Rs1,000 billion. 

Around 70 per cent of this is estimated to be denominated in the dollar. This is in addition to the foreign currency creditors, estimated at Rs300 billion, taking the total forex exposure of the sector to Rs1,300 billion as on end-March. All the telcos depend heavily on global telecom infrastructure vendors such as Ericsson, Alcatel, Huawei and Nokia for their equipment, spending billions annually. 

“More, with the steep increase in diesel prices, fuel cost of the telcos is set to go up, primarily related to tower sites. A likely 15 per cent increase in diesel prices is set to have an impact of three to four per cent (translating to Rs20 billion) in the FY19 estimated industry Ebitda,” said Jagnani.

Analyst reports for the September quarter estimate higher diesel prices' impact up to 60 basis points on the Ebitda for the sector. The industry has been looking at alternatives such as solar power but diesel costs can still take up to eight per cent of a cellular operator’s revenue. 

A leading analyst, who did not wish to be named, said: "There would be no direct impact on profit and loss, as costs are mostly rupee-linked for the telcos. However, interest costs will be impacted significantly, due to their large debt component."

With inputs from Amritha Pillay