Peak investment cycle for Indian telecom companies is over: Analysts

The peak investment cycle for Indian telecom companies is over and the intensity will slow down, said analysts tracking the sector. 

Reliance Industries  Chairman Mukesh Ambani had said during the company’s annual general meeting earlier this month that “the investment cycle for Jio is now complete”. He had said that only marginal investments in access were now required to grow capacity to meet growing demand. 

Jio has invested Rs 3.5 trillion towards creating digital infrastructure, including its optical fiber footprint, across India. It recently divested Rs 1.17 trillion of tower and fiber infrastructure into separate infrastructure investment trusts (InvITs).  

Analysts at Macquarie noted: “Jio capex will fall to maintenance mode. We have annual capex falling 40 per cent versus current levels over the next few years.”

Revenues for the wireless industry in India have been down 25 per cent since Jio’s launch in 2016, but analysts feel the industry would return to growth in 2019-20 (FY20). 

Goldman Sachs analysts pointed out that the earnings before interest, tax, depreciation, and amortisation (Ebitda) of Bharti Airtel’s wireless business is down 60 per cent since Jio’s launch, but it now expected the Ebitda to grow at a 30 per cent CAGR over the next three years and reach pre-Jio levels by FY22. “In our view, Airtel has largely closed the network gap with Jio, especially in urban centres, and in recent quarters, its revenue growth has been converging with that of Jio,” Goldman Sachs noted in a report.  

Despite pressure on revenues in the recent years (wireless revenues down 27 per cent during from FY17 to FY19), Airtel has increased investments in network, with its FY18-19 India capex 50 per cent higher than that of the previous two years, the brokerage noted. 

However, the capex intensity is expected to decline. “With 4G network population coverage for Airtel now over 80 per cent, we expect the company’s capex intensity to start declining in FY20, and forecast FY20-22E capex to sales for Airtel to be around 21 per cent, in line with global peers,” Goldman Sachs noted. 

Gopal Vittal, managing director and chief executive officer (India & South Asia) of Bharti Airtel, had said during the June quarter earnings call that the company had stopped giving guidance on the capex front. But, he did indicate that capex was going to be lower than last year. 

Ali Asgar Shakir from Motilal Oswal felt that while capex intensity for Jio and Airtel may decline, for Vodafone Idea it may taper from next financial year.  

Vodafone Idea, which saw its revenue decline by 4.3 per cent sequentially in the June quarter, slipping below Jio, is perhaps the most-stressed telco in the domestic market. It has steadily lost customers (almost 90 million) in the past year and has seen its subscriber market share shrink to around 33 per cent. 

Analysts feel that in a no-tariff hike scenario, at the current cash burn rate, Vodafone Idea’s cash balance could reach very low levels by September 2020. 

Maybank Kim Eng analyst Neerav Dalal said, “We forecast that net debt will increase to Rs 1.4 trillion for FY22 (estimates) from Rs 1.2 trillion in FY19.” The company has about Rs 4,000 crore annual debt repayment obligations over the next two years and spectrum-related payments of about Rs 12,000 crore in the next 12 months. 

Analysts, thus, feel that to manage its cash burn, Vodafone Idea could look to cut back on capex and opex.  

Emkay Global noted that Vodafone Idea’s opex savings target would have to be raised higher than the guided Rs 8,400 crore as cash losses remain at elevated levels. It added that the company hired one of the Big Four consultants to re-look at its opex and drive additional cost savings.

As such, Vodafone Idea capex has started showing signs of slowing down — in the June quarter it stood at just Rs 2,840 crore lower than the previous quarter’s Rs 3,200 crore (Q4FY19).

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