Telecom market repair still some time away: Jefferies

Indian telecom "market repair" is still some time away as the top players are in consolidation phase and seeking to raise over Rs 1 lakh crore in funds, global investment banker Jefferies said in a note. The first half of 2019-20 fiscal year will see equity fund-raising of over Rs 1 lakh crore led by separate rights by Vodafone-Idea and Bharti Airtel of Rs 25,000 crore each, and Reliance Jio's demerged Fiber and Tower InVITs which will need equity funding for the majority of the Rs 1.1 lakh crore liability, it said.

"The funding reduces leverage for Bharti and Reliance but is inadequate for VodaIdea, in our view," it said. "With Jio focus remaining on subscriber addition, the market repair is still 12 months away." Jio has de-merged its fiber and tower assets into a separate company, which is majority owned by an InvIT. It has transferred Rs 1,07,300 crore of liabilities, the majority of which will need to be refinanced by an equity raising in InvIT.

"We believe that price hikes are unlikely in FY20 and will happen only once Jio becomes the dominant player with 40 per cent market share which we expect in FY21. We expect VodaIdea market share to fall to 20 per cent and Bharti to remain steady at 30 per cent by FY22," it said. "Given the focus of Jio on subscribers and usage, we expect the market repair to take 12 months-plus. Further competitive intensity in the near term will remain high especially in the postpaid segment."

Bharti's rights issue and Jio demerger indicate that pricing improvement in the market is still some time away. With Bharti balance sheet repair, it is well placed for the competitive market. Jio has also reiterated that its focus is on market-share and subscriber gain. "Jio, in fact, does need to gain outsized market share and be the dominant leader to realize its ambition around its digital portfolio. It has made significant investments in digital properties and ambitions around retail and value generation in these imply a focus on market share in the near to medium term," it said.

Jefferies forecasted that Jio would be the largest telcom firm by market share in 4Q 2019 but did not expect the competitive intensity to decrease.

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Presently, VodaIdea is the market leader with a 31.4 per cent market-share, followed by 30.6 per cent of Bharti. Jio has a share of 29.2 per cent with over 300 million subscribers. Jio's target is of 50 per cent market share. With VodaIdea remaining under pressure and financial constraints, Bharti and Jio are likely to focus on gaining higher market share. Jefferies expected VodaIdea market share to fall below 25 per cent over next 18 month and so will require additional funding in FY21. While Bharti is better placed in the medium term, near-term risks remain high.

"VodaIdea management has guided that the Rs 25,000 crore fundraising will address the funding concerns and will allow it to complete its capex plans. We believe though it will need further funding in FY21 to fund capex and spectrum repayments," it said. VodaIdea has reported the net debt of Rs 1.15 lakh crore and an additional Rs 12,400 crore of liabilities (vendor credits and interest accrued) against Rs 25,000 crore rights issue.

It has funds of Rs 55,600 crore, accumulated from rights issue (Rs 25,000 crore), stake sale in Indus Tower (Rs 5,500 crore), cash in hand (Rs 8,900 crore) and funds from operations (Rs 16,200 crore), to use over two years. Against this, it has a requirement of Rs 74,000 crore -- Rs 27,000 crore in liability towards spectrum fee payments, Rs 17,100 crore debt and interest repayment, and Rs 30,000 crore capex.

"Consequently, it needs total funding of Rs 18,400 crore in FY21 starting from 1QFY21. The net debt at end of FY20 will still be Rs 1.2 lakh crore against EBITDA of Rs 5,900 crore, implying a net debt to EBITDA of 21x. We thus see further liquidity constraints for VodaIdea in FY21 unless the market repair happens ahead of our expectation," Jefferies said. "Bharti will see a lowering of leverage post-fundraising and will, along with Jio, be better positioned to compete."