Telecom sector may cut debt up to Rs 90,000 crore with sale of tower assets: ICRA

Key Highlights:

• Telecom sector debt as on March 31, 2017 stood at Rs 18,000 crore.
• It is estimated to reach Rs 4.8 lakh crore by end of FY18.
• ARPTo for a sample of companies has grown at CAGR of nearly 4%

There may be some respite for the debt laden telecom industry in India. Ratings agency, ICRA on Monday revealed how the industry could substantially prune its debt.

“As per ICRA estimates, debt to the tune of Rs 80,000-90,000 crores can be pruned from the telecom industry if the stake sale transactions of tower assets currently under discussions materialise,” the ICRA report said.

Debt of the industry was earlier estimated to reach Rs 4.8 lakh crore by end of FY18, as per ICRA estimates.

Most of the debt stemming from spectrum related payments.

The telecom tower industry has around four lakh towers and around eight lakh tenancies, the report revealed.

“The (tower) industry generates steady cash flows given its indispensability to the telecom services and benefits from the inherent strengths of the lease agreements or Master Service Agreements (MSA) which include: long tenure (the MSAs range from 10-15 years), penalties on exit before a fixed lock-in period, per annum escalations in rentals, and incentivising addition of new tenants. This, along with moderate capex over the last few years has enabled many tower companies to achieve strong financial profile with steady reduction of debt. The industry is now on a solid footing to expand as the telecom sector looks for greater and deeper network expansions to meet the growing need for data,” said Harsh Jagnani, Sector Head & Vice President – Corporate Ratings, ICRA elaborates.

High competition in the telecom industry post the entry of Reliance Jio and increase in debt has forced many players out of the market and others to consolidate.

The telecom industry is consolidating from a 10 player market to just four in the next few years. Now the tower industry is expected to undergo changes as well.

“The key development for the industry would be the likely change in ownership from telecom operators to independent players, as reflected by the consolidation transactions under way and by the interest from such players and investors,” ICRA said.

However this may also bring about transferring of debt to the tower industry.

“ICRA estimates that the consolidation transactions in the tower industry would entail some debt migrating from the telecom industry to the tower industry. However comfort is drawn from the tower industry’s relatively stronger balance sheet and greater predictability of cash flows. As per ICRA estimates, the net debt of telecom tower industry stands at ~Rs. 18,000 crores as on March 31, 2017 having reduced from ~Rs 28,000 crores as on March 31, 2013, translating into strong debt coverage metrics - Net Debt/OPBDITA of 1.1x and interest coverage of 7x,” Jagnani added

As per ICRA estimates, over the last four years, the telecom tower tenancies have grown at CAGR of 5.5%, while the growth in rentals has been nominal. “The Average Revenue per Tower (ARPTo) for a sample of companies has grown at CAGR of ~4%.”

ICRA pointed out that tower companies may also look beyond traditional business and explore opportunities in areas such as in-building solutions, WiFi hotspots, fiberisation although the business models around these remain to be developed.

“A saving grace would be that the culmination of the consolidation would coincide with the revival in capex by the telecom industry and thus the pruning of redundant tenancies would be compensated by rollout of newer ones,” ICRA said.