Jio, Bharti to gain market share on Supreme Court's verdict: Fitch Ratings

We expect industry tariffs to rise as users adopt higher-price 4G plans. Jio, which was unaffected by the court's ruling, is likely to strengthen its market leadership with further subscriber gains, Fitch says.

Sep 08, 2020 04:09 IST India Infoline News Service

The Supreme Court of India's decision to allow telcos to pay outstanding adjusted gross revenue (AGR) dues over 10 years from April 2021, will not be enough to help struggling third-largest telco Vodafone Idea Ltd to stabilise its position and we expect market leaders Reliance Jio, a subsidiary of Reliance Industries Ltd (BBB-/Stable), and Bharti Airtel Limited (BBB-/Negative) to increase their market shares, says Fitch Ratings.

We believe Vodafone Idea will gradually lose market share given its weak balance sheet and limited financial flexibility. We expect industry tariffs to rise as users adopt higher-price 4G plans. Jio, which was unaffected by the court's ruling, is likely to strengthen its market leadership with further subscriber gains.

We expect Jio and Bharti to increase their combined revenue market share to 75%-80% from around 70% in the next 12-18 months, at the expense of Vodafone Idea, which will likely lose 50 million-70 million subscribers in the next 12 months; it lost about 155 million subscribers in the last nine quarters. We believe Jio could snap up more than half of Vodafone Idea's subscriber losses, with the balance going to Bharti.

Jio reported EBITDA growth of 55%, while Bharti reported Indian mobile EBITDA growth of 35% in the first quarter of the year ending March 2021 (FY21), but Vodafone Idea's quarterly EBITDA has been stagnant at USD200 million-230 million, which covers only half of its interest cost. Vodafone Idea's auditor expressed material uncertainty over the company's ability to continue as a going concern, which, the auditor said, depends on successful negotiations with Vodafone Idea's lenders to waive their rights to repayment after breaches of covenants under its bank loans.

Vodafone Idea's plan to raise about USD3.4 billion through a mix of equity (not exceeding USD2 billion) and debt, is unlikely to restore its competitive position and reverse subscriber losses, because the amount would not be sufficient for capex. At end-June 2020, it had a cash balance of USD470 million, which was well short of short-term debt maturities and guarantees of USD3.6 billion. It has so far paid about USD1.1 billion of its total unpaid dues of USD8.9 billion, and it will need to pay around USD1-1.2 billion a year during FY2021-2031.

The Supreme Court's latest ruling will allow Bharti to pay the remaining outstanding dues in 10 annual payments of about USD600 million starting March 2022 instead of a lump sum. It has paid USD2.4 billion of the total USD6.4 billion in unpaid AGR dues, and we have factored in the balance into our leverage calculation for FY21. We forecast Bharti's FY21 FFO net leverage to be 2.1x-2.4x (FY20: 2.1x), below 2.5x, the threshold above which we may consider negative rating action, as higher tariffs and an increasing subscriber base will offset the AGR payments.

Bharti's FY21 Indian mobile EBITDA is likely to improve by 30%-40%, supported by a wider EBITDA margin following tariff hikes and 5%-6% subscriber growth. Fitch expects Jio's FY21 mobile revenue to increase by 45%-50%, led by higher monthly average revenue per user (ARPU) and subscriber additions of about 40 million (FY20: 80 million).

We believe another tariff increase of at least 20% is probable in the next 12 months. Vodafone Idea, whose ARPU is about 30% lower than Bharti's, may increase tariffs to improve cash flows. All three telcos simultaneously increased tariffs by an average of 30% in December 2019. We estimate industry ARPU to grow by around 10% in FY21, as users upgrade gradually to higher-tariff 4G price plans. Bharti's management also believes that industry monthly ARPU needs to grow to around INR200 and eventually to INR300 (1QFY21: INR140) for a sustainable industry business model in the medium to term.

The Supreme Court's original ruling in October 2019 led the Department of Telecommunications (DoT) to demand about USD23 billion in unpaid dues on licence fees and spectrum usage charges from Indian telcos. The demand pertains to a 14-year-old dispute regarding the definition of AGR, which the Supreme Court, in agreement with the DoT, says should include all kinds of income generated by the telcos. Typically, telcos pay about 3%-5% of AGR as spectrum usages charges and 8% as licence fees.

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