India telco fines could cut competition for Singtel Bharti Airtel

Singapore

A FRESH court ruling in India could shave some 4 per cent off mainboard-listed Singtel's S$53 billion market value, DBS analyst Sachin Mittal warned in a flash note on Friday.

Still, stock watchers think that Bharti Airtel - a key regional associate that has weighed on shareholder Singtel's earnings and balance sheet - could find a silver lining if the judgment forces rival Vodafone Idea out of the market. Rounding the corner, Bharti Airtel would fight mano a mano with Reliance Jio, which is backed by tycoon Mukesh Ambani.

The duopoly could put Bharti Airtel on a better footing - and, by extension, benefit Singtel, which saw its net profit for the three months to June 30 plunge on the back of regional associates' results, including a S$162.2 million loss at Bharti Airtel.

India's mobile operators were ordered on Thursday to pay the state 920 billion rupees (S$17.6 billion) - after a protracted legal tussle over the definition of "adjusted gross revenue", which determines licence fees - although analysts also expect the Indian government to offer some relief, such as an extension or a staggered payment schedule, or partial waivers.

While affected companies have yet to disclose the exact amounts they owe, one estimate puts Bharti Airtel on the hook for 446 billion rupees - or, as DBS' Mr Mittal noted, close to one-fifth of its market capitalisation.

"Since Bharti comprises (around) 22 per cent of Singtel's valuation, this may have an adverse theoretical impact of (about) 4 per cent on Singtel's market cap," he added in a flash note.

But in the race to the bottom, Bharti Airtel may be better placed than peers to withstand the court ruling and bear the past dues.

India's telecom players are already reeling from the heavy debt piled on in a protracted price war kicked off by upstart Reliance Jio's fire-sale prices - and Vodafone Idea, formed through a merger last year between Idea Cellular and a local unit of Britain's Vodafone. They have seen customer numbers and share price battered in that time.

With the latest ruling factored in, Maybank Kim Eng has forecast that Bharti Airtel's net debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio will come in at 4.5 times in FY2020, compared with 22.8 times for Vodafone Idea, which may not have the cash to pay its dues.

Mr Mittal also pegged a higher debt-to-Ebitda multiple for Vodafone Idea than for Bharti Airtel, writing in his flash note that the merged operator "may struggle to pay the amount due... and potentially seek an exit".

Meanwhile, in a turning point as the competition bows out, Reliance Jio has signalled an end to the free services that had burned through telcos' pockets and forced the Indian market into the red.

As Reliance Jio raises prices, "Bharti Airtel's losses may level off faster than expected", Bloomberg Intelligence analysts suggested. They also noted that Bharti Airtel could up the pace of its de-leveraging to cushion the blow of the past dues.

Its options include divesting its controlling stake in tower infrastructure company Bharti Infratel, which "will further strengthen its capital war chest, and help support potential acquisitions of pay-TV company Dish TV and future 5G spectrum licences".

Amid heavy debt and network and spectrum costs, Bharti Airtel earlier this year embarked on a rights issue that led credit agencies to eye Singtel with some concern.

Moody's and Fitch lowered their outlook on Singtel from "stable" to "negative" in March, while S&P's did so in July.

Singtel had agreed to subscribe to new shares for 37.5 billion rupees, while trimming its effective stake from 39.5 per cent to 35.2 per cent through a renunciation in favour of Singapore sovereign wealth fund GIC.

Nitin Soni, director of Asia-Pacific corporate ratings at Fitch Ratings, called the latest court decision a setback for the Indian telecom industry, even with the timeframe and the size of the unpaid dues still uncertain.

While it is not his base case, he told The Business Times that Singtel's cash flows could face a material hit should Bharti Airtel need a capital injection, while the negative outlook on Singtel "reflects our expectations of a weakening credit profile amid intensifying competition in its home markets in Singapore and Australia".

DBS has stuck to its "hold" call on Singtel and its target price of S$3.12.

Singtel shares closed up on Friday by S$0.03, or 0.93 per cent, at S$3.27.