Negative outlook for most Indian telcos in 2012, says Fitch

Fitch Ratings said in a special report released today that the 2012 outlook for most Indian telecommunications operators (telcos) is negative, as the nationally-owned and six smallest private telcos will continue to suffer operating losses.

Fitch said in its 2012 telecom sector outlook report titled, 2012 Outlook: Indian Telecommunications Services -Weaker Operators will Struggle, that it expects the fifth-and sixth-largest operators may manage to break even in EBITDA terms in 2012.

"Although the high level of competition is leading to very weak financial performance for most Indian telcos, Fitch believes that the credit outlook for the top-four telcos is stable," said Nitin Soni, associate director in Fitch's Asia-Pacific Telecommunications, media and technology team. "The credit metrics of the four largest telcos should improve in 2012, benefiting from a more stable pricing environment and positive free cash flow (FCF) generation. However, all operators remain exposed to significant regulatory risks," added Soni.

Fitch notes that the final version of the National Telecom Policy (NTP) and Spectrum Act 2012 should bring much-needed regulatory clarity on the issues of spectrum-refarming, the imposition of spectrum renewal fees, and one-time charges for excess spectrum.

However, the 10 October 2011 draft NTP proposals to allow spectrum-sharing and trading, on voice over internet protocol (VoIP) and for the removal of national roaming charges present a challenge to the top four telcos

Although India is one of the most competitive telecom markets in the world, Fitch expects that 2011's stable pricing environment will be sustained through 2012. Bharti Airtel Limited's ('BBB-'/Negative) initiative to raise on-net voice and SMS tariffs by 20% was followed by most of its competitors. Fitch, therefore, expects average revenue per minute to remain steady, at about INR0.41-INR0.44, in 2012.

The agency believes that the stable pricing environment in 2012 will more than offset the reduced subscriber growth, leading to higher revenue growth than in 2011. Voice and SMS revenue should continue to dominate the 2012 revenue mix, while data should contribute only minimal revenue.

Fitch expects wireless subscriber growth to fall to an average of 7-9 million per month (H12011: 14 million) due to telcos' moves to report only active subscribers and the likely de-linkage of spectrum allocation from reported subscriber growth. Nevertheless, subscriber growth prospects remain strong, as active subscriber penetration was just 50.7 per cent at end-August 2011.