The telecom sector is going through a tumultuous period. The sector’s gross revenues contracted by 7 per cent in the quarter ended September, over the same period in the previous year. In the third quarter, too, telcos reported a contraction in top line. For instance, Idea’s revenues from operations fell by 25 per cent in Q3FY18. Though, on a month-on-month basis one can observe a pick-up, as shown in Chart 1.
With Reliance Jio unleashing a price war, the sector's average monthly revenue per user has collapsed (Chart 2). That the decline has occurred despite a sharp spurt in data usage, as shown in Chart 3, affirms telcos have drastically cut back on data costs per user.
As shown in Chart 4, the sector’s debt to equity ratio has risen consistently over the past few years. Its interest coverage ratio, which measures the ability to meet interest obligations, has also deteriorated (Chart 5).
As a consequence of its deteriorating financial position, the sector’s contribution to government coffers has plummeted from Rs 702 billion in FY17 to Rs 307 billion in FY18 (RE), as shown in Chart 6. But, analysts say the government’s decision to extend the timeline for payment of spectrum acquired through previous auctions will help reduce the stress.
A report by Goldman Sachs Investment Research suggests the deferred payment could boost Bharti’s near-term cash flow by at least 3.7 per cent of Ebitda (Chart 7). Morgan Stanley estimates Bharti’s annual payments would reduce by Rs 14-17 billion over FY19/20. For Idea, the gains are estimated to be more, as the boost to cash flow would be larger than 18.5 per cent of Ebitda (Chart 8). This decision, coupled with the approval to raise overall spectrum holding of an operator to 35 per cent from 25 per cent, and the removal of the 50 per cent spectrum cap in the same band, could help boost sentiment. As shown in Chart 9, major telcos have been underperforming the broader market.