Fitch abandons negative outlook on Indian telecom, sees return of growth

Airtel promotion of its Rs 448 scheme

International credit rating agency Fitch said it revised its outlook on the Indian telecom sector to ‘stable’ from ‘negative’ and sees the sector returning to revenue growth in 2018.

“We expect gradual price discipline in India’s telecoms sector to drive a mid-single-digit revenue recovery in 2018, following 2017’s falls,” the firm said in the context of the recent investment by Singtel into Bharti Airtel, the market leader by revenue.

The change of outlook has been prompted by the stronger competitive position of the country’s three major telcos – Bharti, Reliance Jio and the merged entity of Vodafone-Idea – and the exit of smaller operators, it added.

Indian telecom sector witnessed major disruption in 2017 due to the entry of Reliance Jio, which smashed the ‘price equilibrium’ maintained by the three main players Bharti Airtel, Vodafone and Idea Cellular for years.

Before the entry of Reliance Jio, the Indian telecom market had not seen much pricing declines even though newer technologies such as LTE had significantly cut the cost of providing voice and data services.

The market was kept in a pricing equilibrium thanks to watchful efforts by incumbents that prevented prices from declining.

However, Jio’s entry changed everything as it leveraged LTE technology to drive down the costs and undercut the ‘equilibrium price’.┬áCompared to about Rs 220 per GB charged by the incumbents, Reliance Jio entered the market with rates of less than Rs 10 per GB.

Despite this, the player was able to make a profit even as it plunged incumbents like Idea Cellular into losses with its high-volume, low-price strategy. That said, Jio is far from generating a decent return on the equity capital invested into the company.

Fitch said it expects the Indian market to have hit a bottom already, and things will look up from here, as evidence by the vote of confidence by Singtel.

“Singapore Telecommunication Limited’s continued investments in Bharti Telecom reflect its desire to capitalise on the long-term growth potential of India’s telecoms market.. This also underscores our view that the industry may have reached bottom and that pressure on incumbent Indian telcos should gradually ease this year.”

Singtel announced on 5 February 2018 that it will subscribe 556 million Singapore dollar worth of new shares in Bharti Telecom, raising its effective stake in Bharti by 0.9% points to 39.5%.

The investment follows Singtel’s August 2016 acquisition of Bharti Telecom shares from Temasek Holdings.

Despite the high stake, the Indian telco is unlikely to start generating much profit or cash for Singtel immediately because of its continued need for large capital expenditure, Fitch added.