Crisil expects tariff hikes; downgrades one telco

Following the Supreme Court of India's (SC) order, dated 2 February 2012, cancelling 122 unified access service licences (UASL) granted to mobile service operators on or after 10 January 2008, Crisil's ratings arm, Crisil Ratings, has placed one rating on 'Watch', and reaffirms five others, while Crisil's research arm, Crisil Research, which operates independently of Crisil Ratings and does not have access to information obtained by the latter, expects an increase in policy uncertainty and an imminent hike in tariffs.

CRISIL Research:

The SC decision compounds the regulatory challenges in an industry, which is already grappling with multiple uncertainties regarding spectrum allocation and pricing, mergers and acquisition norms, and procedures for renewal of existing licences when they expire.

Nevertheless, competitive intensity in the sector will reduce, leading to improvement in pricing power for the established players. With the number of operators likely to reduce, incumbent operators will be in a better position to hike tariffs. Moreover, operators who acquire licences under the new process are likely to raise tariffs to cover the higher licence fees. Consequently, telecom tariffs will increase significantly, resulting in improved profitability for the current operators.

Some operators whose licences have been cancelled may even choose to exit the business in the wake of the SC verdict, either because of deterioration in their business prospects, or limited possibility of securing additional funding. Foreign investor sentiment towards the sector and availability of funding may also be adversely impacted.

CRISIL Ratings:

CRISIL has placed its rating on Sistema Shyam Teleservices Ltd's (SSTL's) on 'Rating Watch with Negative Implications' while reaffirming its ratings on Bharti Airtel Ltd (Bharti), Vodafone India Ltd and its group companies (the Vodafone group), Idea Cellular Ltd (Idea), Tata Teleservices Ltd (Tata Tele), and Tata Teleservices (Maharashtra) Ltd (TTML).

The rating action and rating reaffirmations follow the SC order, dated February 2, 2012, cancelling 122 UASLs granted to mobile service operators. The impact on SSTL is severe as its licences have been cancelled in 21 circles, while for Tata Tele and Idea, the impact is limited, as their licences have been cancelled in only three and nine circles, respectively. For Bharti, the Vodafone group, and TTML, the licences remain unaffected.

The rating action on SSTL is based on CRISIL's belief that the verdict can potentially impact more than 80 per cent of SSTL's revenues. CRISIL is in discussions with SSTL's management, and will remove the ratings from watch and take appropriate rating action once it gains clarity on SSTL's future course of action, with regard to fresh applications for licences, and related funding plans.

The ratings on Tata Tele and Idea have been reaffirmed because revenues from the affected circles constitute less than 5 per cent of their revenues from mobile services. CRISIL has reaffirmed its ratings on Bharti, TTML, and the Vodafone group because the SC verdict is unlikely to impact their operations.

Outstanding CRISIL ratings