The 40-day lockdown has been a boon for the telecom industry as work from home concept has surged the overall traffic for Indian telecom service providers. However, this boost will not compensate for the distress that the telecom sector has been facing due to intense competition, pricing pressures that culminated into weakened profitability and elevated debt levels and the adjusted gross revenue (AGR) dues, as per experts.
“Even if they are immune to the impact of the coronavirus pandemic (COVID-19) outbreak, they have more significant challenges like the AGR issue to deal with,” said a senior executive of a telecom equipment manufacturing firm on the grounds of anonymity.
Telecom services are considered an essential service by the government, Airtel and Vodafone are not in the pink of health and therefore they might have trouble surviving this, the senior executive opined.
As AGR issue casts a significant degree of uncertainty on the telecom sector, and will have a long-term bearing on structure and recovery of the industry, according to rating agency Icra, but there will be no major impact of the ongoing nationwide lockdown on telecom services. AGR trumps Coronavirus in distressing telecom industry
Anupama Arora, Vice President and Sector Head, Corporate Ratings of the credit rating agency ICRA highlighted that the AGR related dues (required to be paid as per the Supreme Court (SC) order which is pending as the lockdown happened) casts uncertainty regarding recovery timelines notwithstanding steep tariff hikes announced by all telecom operators in December 2019.
As AGR issue casts a significant degree of uncertainty on the telecom sector, and will have a long-term bearing on structure and recovery of the industry, according to rating agency Icra, but there will be no major impact of the ongoing nationwide lockdown on telecom services.
This is because the pressure on revenues on account of limited customer addition, along with lack of physical recharges is moderated by the surge in mobile usage due to work from home regime and content viewing, supported by shift to digital recharges.
“Increased usage of telecom services as people work remotely/ from home has exerted pressure on network capacity of telecom operators, thus, the ability of their networks to support growing usage for a prolonged period remains to be seen if the lockdown persists,” said Arora.
Rightly pointing towards the fact that even though the demand is going up for the telecom industry, to improve the penetration and support the data demand the tower infrastructure has to grow. In the current scenario, tower maintenance can happen but incremental tower installation is not happening, commented the senior executive anonymously.
The extension in lockdown would mean keep supporting the rising demand, but it can now be challenging as the required infrastructure is not available.Anupama Arora, Vice President and Sector Head, Corporate Ratings of the credit rating agency ICRA
Vodafone Idea has further enhanced network capacity in the circle by deploying the most efficient 900 MHz spectrum band on 2300 4G sites, announced the company on April 16. “These recent network augmentation efforts are being undertaken to support the growing data demand during the national lockdown due to Covid pandemic,” said the company in an official statement.
The current fiscal witnessed green shoots of recovery in financial performance primarily on the back of steady Average Revenue Per User improvements, deleveraging initiatives and moderation in capex intensity, explained Arora.
Right now, though telecom services comes under essential services, the challenge is that labourers have migrated to their hometowns, the companies are not able to work in full capacity, and there are also instances where frontline workers are not able to move as local police officer don’t allow it.Possibility of lay-offs…
Even though the industry is expected to survive this, there might be still layoffs or salary cuts in the industry but for reasons beyond COVID-19, said the senior executive of the telecom gear maker.
Ultimately, (the executive explained) that if Vodafone cuts costs for its own survival, then their suppliers like Nokia, Ericsson, ZTE Corporation, Huawei will get impacted. There will be a ripple effect in the industry.
Right now, though it comes under essential service, the challenge is that labourers have migrated to their hometowns, the companies are not able to work in full capacity, there are instances where frontline workers are not able to move as local police officer don’t allow it.
Industry body Cellular Operators Association of India(COAI) also alleged that telecom operators are facing issues in maintaining networks as their employees on duty are being harassed and even beaten by police in some states.
The impact of novel coronavirus on the telecom industry may get adverse – in the extended period of lockdown if more people are not paid for 30-35 days. Many may lose their jobs ultimately consumption will suffer, having a ripple effect on the other industries.
So recovery from this will not be easy. To our mind, that is the biggest concern as it will be hard to rebuild sales to that level.Anupama Arora, Vice President and Sector Head, Corporate Ratings of the credit rating agency ICRA
A view of telecom towers installed over the buildingsTelecom Sector Outlook for FY 20-21
“While the recent tariff hikes would allow industry post a high teens revenue growth in FY2021 and around 20% expansion in operating profits, the credit metrics would continue to remain weak with total debt/ OPBITDA (operating profit before interest, tax, depreciation and amortisation) expected to be over 6x (considering AGR payables) even as cash flow from operations improves and there is the reduction in capex intensity,” she explained.
The SC on March 17, ordered that the telecom dues to be collected as per Department of Telecommunications (DoT) saying that self-assessment of AGR dues was contempt of court. But it allowed the government to go ahead with a deferred payment mechanism. The SC was to hear the matter in the coming two weeks, however, the lockdown on March 25 has left everything unclear as to when the next hearing will happen.
There is also a possibility that the apex court will reconvene and agree with the relief measures sought by the DoT including a payment period of 20 years. Which will be a big relief for the sector.
Vodafone Idea, which is particularly hit hard, paid a self-assessed principal amount of Rs 6,854 crore. It has to pay a total of Rs 58,254 crore towards AGR dues. Airtel, paid a self-assessed amount of Rs 18,004 crore and has to pay a total of Rs 43,980 crore. Tata teleservices paid Rs 4,197 crore and has to pay a total of 16,798 crore.
Gear makers Outlook for FY20-21
Arora, telecom analyst of ICRA said, “The capex intensity for telecom operators is expected to come down with sizeable investments already made in the past. Telecom operators will continue to invest to improve the infrastructure to support growing data requirement as well as conversion from 2G to 4G.”