100% Telecoms FDI won't change the fundamentals

Don’t expect any major changes to India’s telecom sector on account of this week’s announcement by the Government of India to lift the cap on Foreign Direct Investment into telecoms service from the current level of 74% to 100%.

In India there are major four mobile service providers with majority stakes owned by foreign investors: Aircel (Maxis of Malaysia is the foreign investor); MTS (Sistema, Russia); Uninor (Telenor Group, Norway); and Vodafone (Vodafone Group, UK). In each of these cases the overseas investor is currently at or near the erstwhile 74% limit.  There are several other entities in India owned principally by European and US-originated telecoms operators which provide important back-office functions from India (such as data centres, shared services facilities and network support services) all of which are also invested by their foreign majority owners up to the 74% cap today.

In recent years foreign investors wanting to bring in additional funds into these companies for much-needed investments have been prevented due to the 74% cap, and most local joint venture partners (who hold parts or all of the other 26%) have generally not stepped forward to put up their own share. Lenders too have increasingly been unwilling to provide more debt.

Are banks shy of telecoms debt?  No.  On the contrary, banks have already lent so much that they cannot stomach lending much more.  Indian telecoms today owes around INR 185,000 Cr ($30bn) to Indian and foreign banks.  This presents a Debt to EBITDA ratio of around five, some way above the thresholds that banks are usually comfortable with.

While channels for bringing new funds into the sector are constrained, our estimates suggest that the sector could need an additional $50bn in investment over the next five years.  Funds are needed to sustain network expansion in 3G, 4G, fibre and WiFi across the country, along with new technology and services roll out to hyper-connect India to more advanced data services.

Given this pressing need for cash, Indian telecoms should welcome any relief to the ability to raise finance.  The removal of the foreign investment cap means that foreign-invested operators will now have a few additional options to fund future investment needs.  Foreign investors could invest more capital themselves and not be worried about exceeding caps; they could invest more and borrow more (keeping the gearing ratios manageable); they could invest more and pursue other options to infuse new shareholders, such as to list the company on the local stock market to bring in new investors.  Possibly wary of some of the relationships they have had to manage in the past, foreign telecoms investors could now also exercise more freedom in who they partner with locally, no longer beholden to pre-determined ownership rules which have forced alliances with strange bedfellows.

However, while the lifting of the FDI restrictions may be a welcome policy measure and a signal to the world that India welcomes more global investment it is unlikely to impact the fundamentals driving investment in the industry.  Slowed revenue growth, delays to expected data uptake, inferior profit margins (for most), continued speculation over spectrum pricing and availability, and recently elevated concerns over macroeconomics and currency in particular, continue to moderate the investment appetite.

So if not fundamental and quick change, what may we expect from this week’s FDI ruling over the next two years? Well, we may see some foreign-owned telecom service providers consolidate ownership further towards the 100% mark, replacing local partners and investors who seek an exit.  Beyond that, further fundamental change will depend on greater clarity on spectrum policy, as well as demystification of the mergers and acquisitions environment by making it easier for players to acquire and sell spectrum rights separately from the rest of the business.

The thoughts and opinions shared here are of the author.