India Ratings ups outlook on telecom sector to stable

"The outlook could be revised back to negative on stressed balance sheets as well as cash flows due to lower-than-expected earnings and higher-than-expected regulatory charges. Competition from Reliance Jio could also strain telcos' pricing power and sustainability of margin improvement, thus leading to a negative outlook.

"Adverse impact of litigation and unfavourable policies on spectrum reframing in the 900 MHz band, spectrum sharing and trading policy, and spectrum usage charges will have a negative impact on the outlook," India Ratings said.

The number of telecom operators in all the 22 circles came down to 179 in June 2013 from 277 in December 2012, it said.

The top three telcos -- Bharti Airtel, Idea Cellular and Vodafone India -- continue to gain market share. Revenue market share on the basis of adjusted gross revenues of the top three telcos rose to 70.2 per cent in November, 2013 from 63.8 per cent in December 2012, while their combined subscriber base rose to 483 million from 447 million during the same period, the report said.  "There are clear signs of a shift of the price war from voice to data with data tariffs already being slashed (up to 50 per cent) by large telcos in the last few months of 2013. Simultaneously, over-the-top players are already cannibalising SMS and voice revenues streams," the report said.

The agency believes that the fragmented telecom sector may evolve into an oligopolistic market once sponsors of smaller, unprofitable telcos exit. On consolidation, it said it is likely to be catalysed by relaxing M&A norms and reducing regulatory and legal overhangs.

On the possible downside risks, the report said key risks include spectrum re-farming in the 900 MHz band and one-time fee for excess spectrum which, if implemented, may burden cash outflows for the top three telcos.

The report said the spectrum auctions beginning February 4 will witness active participation, as licences of key players are due for renewal and eight operators have confirmed participation. "However, there is a risk of aggressive bidding in the metro circles which could increase the spectrum payouts for telcos," it said.

Capex outgo is likely to be high in FY 2015 on account of licence renewals and the need to continuously invest in spectrum acquisition and technology upgrade for 3G and 4G services while meeting the expanding the voice and data capacity, it added.