Telecom companies looking to boost free cash flow as sector improves: Fitch Ratings
- The shift from hyper-competition and a rapid transition to 5G networks will aid in deleveraging, the US rating agency added in a note on Friday.
Fitch Ratings has said the Indian telecom sector is improving on the back of rational competition and moderating capex, and that it expects telecom companies to now focus on profitability and 5G monetisation to boost free cash flow. The shift from hyper-competition and a rapid transition to 5G networks will aid in deleveraging, the agency added in a note on Friday. This could lead to merger and acquisitions in areas that complement carriers’ existing services.
"As leverage and financial flexibility improves for Jio and Bharti, there is a greater likelihood that they will pursue M&A opportunities, which could have a negative impact on their credit metrics if substantial and debt-funded. We believe potential opportunities could arise in areas which are complementary to their core mobile, enterprise and broadband businesses. This could include acquisitions in digital TV, data centres and technology," the agency said.
The American rating firm forecast that Ebitda for Bharti Airtel and Reliance Jio would grow by around 10% in 2025, driven by an about 8% increase in monthly average revenue per user due to higher data consumption. A higher ARPU will also support an expansion in the average Ebitda margin, Fitch said.
"We expect Bharti Airtel Limited’s (BBB-/Stable) leverage to continue to improve, driven by tariff hikes and lower 5G-related capex," the agency said. It noted that the average monthly data usage across the Indian telecom market has risen by around 15% over the past year to 21.3 GB a month as of June 2024. This is among the highest data usage across the Asia-Pacific region.
Capex expected to decline
Fitch forecast that capex as a proportion of total revenue would continue to decline for Bharti and Jio as a significant portion of their investments into 5G have already taken place. The two carriers have together spent more than ₹3 trillion to buy spectrum and set up 5G networks across India over the past two years. Carriers have said their capex on network rollout will taper from 2025 onwards.
The rating agency said some of the decline in 5G-related capex would be offset by higher spectrum repayments, which it includes in capex, and continued investments in fibre. "We believe Vodafone Idea will aim to ramp up capex into its network to remain competitive, but its capacity to invest will be contingent on its ability to raise additional capital."
Vodafone Idea is the only private carrier that is yet to launch 5G services in India, but has laid out a plan to invest ₹50,000-55,000 crore in rolling out a 5G network and beefing up its 4G network.
5G pricing
Indian telcos currently have no differentiated pricing between 5G and 4G plans, but in their tariff hikes in June, Airtel and Jio priced their unlimited 5G usage plans higher than limited usage plans in an effort to raise the ARPU. Fitch noted, however, that capex may rise if telcos speed up their rollout of fibre-to-home services, given the low fixed-broadband penetration rate.
"ARPU growth will be driven organically as customers shift from pre-paid to postpaid plans and upgrade to higher-priced data plans. We believe competition will remain rational, with the two largest market participants – Jio and Bharti – focused increasingly on raising profitability and return on investment," it added.
As for Asia-Pacific markets beyond India, the agency said Indonesia remains on a deteriorating trajectory, having postponed its 5G spectrum auction to 2025, and with the potential for increased leverage following the purchase of 5G spectrum and network rollouts.
But it has a neutral outlook on Korean, Malaysian and Indonesian tower companies, which are supported by stable competition and well-balanced capex. Telcos in Korea and Thailand may balance lower 5G capex with higher investment in non-wireless businesses such as AI-related ventures and enterprises, Fitch said.
Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
Business NewsIndustryTelecomTelecom companies looking to boost free cash flow as sector improves: Fitch Ratings
First Published:29 Nov 2024, 03:10 PM IST
- Top Gainers
- Top Losers
- 52 Week High