Indian telecom firms under-investing compared with Asian peers

Indian telecom firms plan to invest a significantly lower proportion of their revenues over the next two years than their Chinese, Indonesian and Philippine peers.

According to Fitch Ratings, this is due to the weaker balance sheets of the Indian operators, and raises the likelihood of capex needing to rise significantly over the medium term.

India's growth in data traffic is likely to be significant, and will require infrastructure investment similar to that of other developing Asian telecom markets.

The Indian, Chinese, Philippines and Indonesian markets are at about the same stage of data penetration. However, Indian telecom firms indicate that capex will decline - while it will step up in the other three countries as operators invest in data infrastructure and expand their 3G / long-term evolution (LTE) networks.

For example, Chinese telecom firms have raised their 2013 capex forecasts by 12 per cent to 15 per cent.

The Indian telecom firms' combined 2013 capex guidance of $5bn to 6bn represents just 17 per cent to 19 per cent of industry revenue compared with 30 per cent in China and Indonesia at $55bn to 60bn and $4bn to 5bn respectively, and 20 per cent to 21 per cent for the Philippines at $1bn-1.5bn.

"Operators remain uncertain about the pace of take-up of data services in the Indian market, but we believe the principal reason for lower investment is higher balance-sheet leverage," Fitch said in a summary of its indian telecom sector report.

It added, "Balance sheets have become stretched due to intense competition and large spectrum payments during 2010-2012. The average funds flow from operations-adjusted net leverage for large Indian telcos is around 3.0x-5.0x versus 1.5x for the Chinese and 1.0x-2.0x for the Philippine and major Indonesian telcos."

Capex per subscriber for Indian telcos is also much lower at $6 per subscriber than Chinese operators whose investment is an average of over $50 per subscriber. Operators in Indonesia and the Philippines have an investment of $16 per subscriber.

Subscribers per MHz of spectrum per operator are about 10-15 million for Indian telcos compared with 5-6 million for Chinese, Philippine and Indonesian telcos, which also indicates that Indian telcos may need to invest more to decongest their networks.

Bharti Airtel Limited, which has a Fitch rating of BBB / Negative, has indicated a lower capex of $2.2bn-2.3bn in FY14, of which $500 million to 600 million will be spent on its African operations.

"We believe that Bharti may have to raise investment in the medium term, which could put some pressure on free cash flow (FCF) generation. However, barring Indian regulatory-related payments, Fitch expects Bharti's annual FCF to be at least $500 million to 700 million, which will support its deleveraging efforts.

Its FFO-adjusted net leverage is likely to improve to 2.6x-2.7x in 2013 (end-March 2012: 3.0x).