Fitch: Removal of FDI limit positive for telcos

SINGAPORE/SYDNEY (Fitch) - The government's decision to remove the foreign direct investment (FDI) limit in the telecom sector will help reduce leverage and strengthen balance sheets in the medium term, Fitch Ratings says. The move could encourage foreign investors - who have previously been put off by FDI rules - to look again at the sector, and allow existing foreign investors to increase their stake in subsidiaries to 100 percent. Taking complete ownership would remove the burden of dealing with a local partner.

Vodafone, Telenor, Maxis and Sistema may be among the first to take advantage of the change, as they are already at the current 74 percent holding limit.

FDI in other Indian telcos, including Bharti Airtel and Idea Cellular, is still well below the current 74 percent limit, so the change is only likely to benefit them in the medium term. Such telcos could invite equity-injection from existing or new foreign investors to improve leverage. Singapore Telecom and Qatar Foundation Endowment own about 32 percent and 5 percent, respectively, in Bharti, while Malaysia's Axiata Berhard owns about 20% of Idea Cellular. Domestically owned Reliance Communication, which has the weakest balance sheet among the top-four operators, could also benefit from this move.

Moreover, the move could potentially lead to bigger M&A deals as the industry needs to consolidate further. For a foreign investor, holding a 100% stake will fast-track the decision-making process and strengthen their confidence. We expect a maximum of six of the current 10 operators will survive in the long term, and that consolidation will occur once the regulator relaxes M&A guidelines further.

The Indian telecom services industry, which generates about USD35bn-37bn in annual gross revenue, is facing a huge debt burden of over USD40bn. This comes at a time when the voice subscriber base has stagnated at around 880-900 million customers, and data services still represent only a small proportion of overall industry revenue. At least 40% of Indian telcos' debt is denominated in US dollars; and they are suffering from a weak rupee, which has depreciated by over 20% in the last two years.

Overall, the decision on FDI supports our view that regulatory risk is fading away. We also believe that a decision on key regulatory risks - including spectrum refarming - is unlikely before the general election due in H114.