India's recent reforms are credit positive for telecom companies including Bharti Airtel and Reliance Jio Infocomm Ltd (RJIL) because they free up cash flow for reinvestment, enable further investment in next-generation technologies and provide support for a three private plus one state-owned telecom operational structure, Moody's Investors Service said on Monday.
On September 15, the government announced a package of reforms for the financially stressed telco sector to ensure a fair and competitive market, and a sustainable level of investment to support growth.
The reform package includes a four-year moratorium on payments for past spectrum purchased and adjusted gross revenue (AGR) statutory fees, and a rationalisation of prospective AGR payments to exclude non-telecom revenue.
"The change in AGR definition to exclude non-telecom revenue will ultimately boost sector-wide EBITDA because it will reduce license fees paid by telcos," said Moody's in its latest credit outlook report.
The government has also done away with spectrum usage charge, a substantial levy on telecom service providers, from future auctions and increased the tenure of the spectrum of holdings to 30 years from the existing 20 years, which is valid for future spectrum auctions.
Bharti's leverage has been improving over the last 12 months on the back of better profitability of its core mobile business and capital interventions.
The company's leverage -- as measured by Moody's adjusted debt (including perpetual securities)/EBITDA -- has fallen to 3.7x for the 12 months ended June 2021 from 4.3x for the comparable period in 2020. This improvement is in line with the expectation of leverage of 3.5x-4.0x by September 2021.
Should Bharti opt for the moratorium on payments for past spectrum purchases and AGR statutory fees, Moody's expects this could free up around Rs 12,000 crore to 13,000 crore of cash flow annually, which could be used to reduce debt further.
In August 2021, Bharti announced that its board had approved the raising of fresh capital through a rights issue of up to Rs 21,000 crore. It said it will raise the equity with 25 per cent of proceeds received initially and the remainder in two tranches over the next three years.
"We expect excess cash flow and proceeds from the equity raise will be used in part to help accelerate debt reduction and for investment in next-generation technologies," said Moody's.
For Reliance Industries, the removal of spectrum usage charges for spectrum acquired in future auctions will improve the profitability of its telecom operations, while the extension of the moratorium on payments for past spectrum purchases will improve its cash flow generation andstrengthen its liquidity.
"We expect RIL's earnings from its digital services segment to grow over the next 12 to 18 months on the back of a further ramp-up of its home and enterprise broadband services. Increased remote working and the shift to online transactions will drive data consumption higher and also increase earnings and cash flow for the segment."
( With inputs from ANI )
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