India’s telecom industry is going through difficult times. Overall debts have risen to about 4.6 trillion Indian rupees (USD 71.5 billion), and at the country’s top seven telcos they were up a fifth in the last fiscal year.
The predatory pricing tactics of Reliance Jio, India’s newest telco, coupled with a huge tax burden have been widely blamed for the current debt crisis. “The stress in the sector has reached highly unsustainable levels after the entry of new players and launch of free services, which led to erosion of the earnings before interest, tax, depreciation and amortization (EBITDA) of the telecom service providers,” said Arundhati Bhattacharya, the chairman of the State Bank of India, in a recent letter to Aruna Sundarajan, India’s telecom secretary.
As Bhattacharya explained in his letter, service providers will find it difficult to cope with the growing pressure on their finances. “The data with us suggests that the total EBITDA of the sector on an annualized basis is INR650 billion [USD 10.11 billion], which is clearly unsustainable for debts of more than INR4 trillion [USD 62.2 billion],” said Bhattacharya.
It looks like a double whammy for India’s telcos. Rising debts have made it hard for service providers to repay their loans. At the same time, they are desperately in need of more funds so they can improve their networks and ensure they remain competitive.
Debts have not grown across the board. Number two player Vodafone India has been able to reduce its borrowing. But it is the only Indian telco to have done so, and only managed it after receiving an INR477 billion (USD 7.42 billion) equity injection from parent company Vodafone Group plc (NYSE: VOD).
For other players, moreover, the debt situation is now a major concern. Reliance Communications, India’s fifth-biggest operator, was recently downgraded by a number of ratings agencies, including Moody’s, Fitch, ICRA and CARE, because of “significant stress on its cash flows and high level of debt.” Total company debts now amount to approximately INR450 billion (USD 7 billion).
All of the incumbent operators have struggled to cope with the market entry of RJio, which has been offering free voice and data services to Indian consumers. Despite recent industry consolidation, players including Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Vodafone, Idea Cellular Ltd. and Reliance Communications Ltd. are finding life tough.
The industry is also staring at the prospect of huge job losses. Reliance Communications Chairman Anil Ambani said in a recent presentation to investors that as many as 40,000 telecom jobs could disappear in the next 12 to 18 months.
But Jio is just one part of the equation. India’s government has continued to punish the industry with huge taxes. Telecom is “one of the highest taxed sectors” of the Indian economy, said Anil Ambani in his investor presentation. The cumulative tax incidence adds up to about one third of telco revenues. On top of all that, operators have had to spend huge sums on spectrum licenses to support the launch of high-speed data services.
India’s telecom industry is at a critical juncture and needs to restore profitability as a matter of some urgency. The government has recently set up a panel to address the financial crisis in the industry. Bhattacharya has also called for “immediate intervention” from the government to “stem the slide.” Some kind of bailout could be a last resort. – Light Reading (Source from CommunicationsToday)
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