ICRA maintains negative year-end outlook for telecom industry

Investment information and rating agency ICRA has maintained a negative outlook for the Indian telecom industry which is grappling with adjusted gross revenue (AGR) dues, notwithstanding the green-shoots of recovery.

The telecom industry woes, according to ICRA, continue as the industry is required to pay a substantial amount to the Department of Telecom in the form of retrospective AGR related dues.

These amounts, as per the Supreme Court order on October 24, are sizeable (including the interest and penalties). In the event of an outflow towards these payments, it will create additional pressure on the balance sheet of the telecom operators, depending on the funding mix.

This comes at a time when the industry's health was on the recovery track on the back of deleveraging initiatives moderation in capital expenditure (capex) intensity and restoration of pricing power.

The sector has passed through a phase of turbulence during the last few years with intense competition and pricing pressures leading to a decline in revenues and profitability.

Consistent downward revision in prices resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs 169 in Q1 FY17 to Rs 124 in Q1 FY20. The industry AGR fell from Rs 44,570 crore to Rs 28,650 crore in the same period.

The overall high operating leverage of the industry meant that the decline in revenues percolated to pressure on profitability and cashflows.

Further, said ICRA, the industry is saddled with elevated debt levels and consistently high capex requirements. The debt has consistently remained high owing to reduction in organic cash flow generation and consistently high capex requirements.

As per ICRA estimates, the debt as on March 31 this year stood at Rs five lakh crore. The private telecom operators undertook deleveraging measures during FY20 which are expected to result in decline in debt to around Rs. 4.4 lakh crore (without taking any incremental debt due to AGR issue).

However, clarity is awaited on the final amounts and the payout timelines as the operators have filed a review petition with the apex court. The government has announced deferral of spectrum auction instalment payments for FY21 and FY22, providing a minor financial succour to the industry.

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