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June 20, 2017 I Industry Research

DoT asks for cut in Non- Media reports suggest that The Department of Telecommunications
(DoT) has asked the Finance Ministry to cut the target by around
tax revenue target for 40% to Rs.29, 524 crore for the current financial year. Therefore, the
telecom sector for FY Finance Ministry which sought to achieve non-tax revenue target of
Rs.47,304 crore from the telecom industry for 2017-18 may have to
2017-18 reconsider the target.

Financial stress in the sector on account of intense competition and


higher debts has prompted the DoT to ask the Finance Ministry to
reconsider the non-tax revenue target.

License Fee and Spectrum Usage Charges (SUCs)

Contact:
The telecom companies have to pay license fee and spectrum usage
Madan Sabnavis charges (SUCs) to the government. As per the current norms, the
Chief Economist telecom companies pay 8% of the adjusted gross revenues as license
madan.sabnavis@careratings.com
91-022-6754 3489 fee and 3-6% of the adjusted gross revenues as spectrum usage
charges. However, of late the industry has been asking the
Bhagyashree Bhati government to reduce these charges as the industry is facing severe
Research Analyst
bhagyashree.bhati@careratings.com competition and is under financial pressure.
91-022-6754 3490
These charges are certain percentage of the telcos’ revenues and a
fall in revenues of telcos due to intense price-war and competition
will impact the government’s revenues from license fee and SUCs.

Mradul Mishra (Media Contact)


mradul.mishra@careratings.com The telecom operators met the inter-ministerial group to assess
91-022-6754 3515 stress in the telecom industry and are seeking support from the
government for its betterment.

Intense competition impacts industry’s financial performance on a


y-o-y basis in 2016-17

Chart 1: Quarterly sales growth rate


10% 8.1%
7.4% 6.6% 7.6% 7.0%
5.9%

0% -1.1%
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

-10% -10.2%
Disclaimer: This report is prepared by the Economics Division of
CARE Ratings. CARE Ratings has taken utmost care to ensure
accuracy and objectivity while developing this report based on -20%
information available in public domain. However, neither the
accuracy nor completeness of information contained in this Source: Ace Equity
report is guaranteed. CARE Ratings is not responsible for any
errors or omissions in analysis/inferences/views or for results
obtained from the use of information contained in this report
and especially states that CARE Ratings has no financial liability
whatsoever to the user of this report.
Industry Research I Telecom Industry

The revenues of the industry that grew in single-digit in each of the quarters during June 2015 quarter to September 2016
quarter on a y-o-y basis declined in the following two quarters on a y-o-y basis. While in the December 2016 quarter, sales
declined by 1.1%, it declerated to 10.2% in the March 2017 quarter. Severe price-war on account of new entrant impacted
the industry’s sales.

Chart 2: Quarterly profit margins (in %)


60
40 35.8
31.2 30.9 30.7 32.1 31.3 28.4 27.8
20
6.3 4.4 9.3 4.9 5.5
0 0.9 0.3
-20 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17
-40
-60 -64.5
-80

Operating margin Net margin

Source: Ace Equity


Note: The impact of exceptional items is significant in March 2017 quarter

It was not just the revenues but also the profit margins that were hit on a y-o-y basis in the December 2016 quarter and the
March 2017 quarter due to predatory pricing. The operating margin contracted in each of these quarters and the net margin
also saw deterioration during these quarters. The results are based on financials of 10 telecom service providers.

Annual financials of the industry on a y-o-y basis

Chart 3: Sales growth rate Chart 4: Profit margins


11% 35%
10.2% 10.2% 32.0%
10% 30% 29.5%
9.8% 26.6%
9.1% 25% 24.6%
9% 22.7%
20%
8% 8.0% 16.9%
15%
7% 13.5%
10%
6% 5% 6.1%
2.7% 2.1%
5% 0%
2011-12 2012-13 2013-14 2014-15 2015-16 2011-12 2012-13 2013-14 2014-15 2015-16

Sales growth rate Operating margin Net margin

Source: Ace Equity Source: Ace Equity

In the financial year 2016-17, the average sales growth rate and net profit margin of the industry remained weak compared
to the sales growth rate and net profit margin in each of the years during the financial years 2011-16. This was due to the
new entrant that forced the incumbent telecom companies to cut their rates for data and other services.

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Industry Research I Telecom Industry

Chart 5: Total Debt (in Rs. Crore)

180,000
154,207
160,000
140,000
120,000 104,878
100,000 86,160
74,257 78,826
80,000
60,000
40,000
20,000
-
2011-12 2012-13 2013-14 2014-15 2015-16

Total Debt (Long Term Plus Short Term)

Source: Ace Equity

During the period 2011-14, the total debt of the 9 telecom service providers grew in single-digit on a y-o-y basis. However,
the growth rate accelerated for total debt in the following years. In the year 2014-15, the total debt increased by 21.7% to Rs.
1, 04,878 crore and further rose by 47% to Rs. 1, 54, 207 core in 2015-16 on a y-o-y basis. This set excludes large players like
Vodafone and Reliance Jio. The debts of the companies are believed to have increased on account of network expansions and
spectrum acquisitions undertaken by the telcos.

Factsheet on telecom industry’s stressed assets and credit

According to the Reserve Bank of India, the deployment of outstanding gross bank credit for the telecommunications sector
stood at Rs.851 billion as on 31st March 2017. This was an increase in deployment of outstanding gross bank credit for the
telecommunications sector compared to the credit as on 30th September 2016 where it was Rs.770 billion. The
telecommunications sector accounted for 8.5% of the total infrastructure sector’s (that includes power, telecommunications,
roads and other infrastructure) outstanding gross bank credit deployment as on 30th September 2016. According to the
Financial Stability Report December 2016, the stressed advance ratio for the infrastructure sector was at 18.6% for the
September 2016 quarter.

As per Union Budget estimates for the financial year 2017-18, the fiscal deficit for India is expected to be 3.24% of the
country’s GDP. The fiscal deficit estimate for the year 2017-18 is Rs.5, 46,532 crore and considering that the telecom industry
will fall short of Rs.17,780 crore to meet the non-tax revenue target set by the government, the fiscal deficit estimate for the
year will stand increased to Rs.5, 64, 312 crore. This, in turn, will increase the fiscal deficit estimate for the year 2017-18 to
3.35% from the estimate of 3.24%.

Concluding remarks

 As the industry is severely under pressure on account of intense competition, fall in sales and profits, increase in debt
and hugely priced spectrum acquisition, the industry has asked for government’s support and so the decision of inter-
ministerial group with respect to industry’s demand remains of utmost importance

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Industry Research I Telecom Industry

 Witnessing the current trend of falling revenues that impacted the collections of license fee and spectrum usage
charges, the telecom ministry is of the view that this trend will continue in the near term as well and so it has asked
the Finance Ministry to cut down its target for non-tax revenue from the sector for financial year 2017-18
 If the telecom industry falls short of the non-tax revenue target by Rs.17, 780 crore, then the fiscal deficit estimate for
India for the year 2017-18 will stand increased to 3.35% from the estimate of 3.24%.

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