Crisil downgrades Vodafone Idea debt due to “pricing pressure”

Ratings agency CRISIL has downgraded certain debt securities of Vodafone Idea Ltd by one notch, quoting conditions in the Indian telecom market.

It downgraded Rs 6,000 cr worth of non-convertible debentures issued by Vodafone from AA- to A+.

The highest rating in the scheme is AAA+, and the current revision represents a lowering of the rating by one notch.

“The downgrade reflects continued pricing pressure in the mobile telephone industry, leading to weak operating performance of Voda-Idea,” CRISIL, a unit of global rating agency Standard & Poor’s, said.

Vodafone Idea, formed out of the merger of telecom operators Vodafone India and Idea Cellular, is struggling to move back into the black after relentless pricing and product competition by new entrant Reliance Jio pushed Vodafone and Idea into the red a year ago.

Prices of data packs have come down by about 90% and those of voice packs by about 50% since Jio entered the scene two years ago.

Earlier this month, Vodafone Idea reported its first set of financial numbers after its formation. The company’s earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to just Rs 2,349 crore for the six months of this year from Rs 11,908 crore for the full year of fiscal 2018.

The company has embarked on an aggressive cost-cutting program to improve margins.

“Synergy benefits of the merger are expected to improve the EBITDA over the medium term. The timely realisation of synergy benefits will be a key monitorable,” CRISIL said.

The agency continued to keep a negative outlook on the rating.

“CRISIL believes the credit risk profile of the combined entity will continue to be affected by competition, while the quantum and timeliness of synergy benefits will be key rating sensitivity factors. Moreover, support provided to the combined entity by its sponsors, Vodafone and ABG, will remain a key monitorable,” it said.

CRISIL, however, did not change the rating on Rs 2,000 cr commercial paper borrowing that the company has.

The agency noted that the company has a strong market position in the mobile telephone segment in India as well as support from strong sponsors in the form of UK’s Vodafone Group and India’s Aditya Birla Group.

“These strengths are partially offset by modest debt protection metrics and exposure to regulatory changes and technological risks,” it said.

Vodafone Idea has strong liquidity, the agency said, marked by liquid surplus of Rs 13,551 crore as on September 30, 2018. The company has principal repayment obligation of Rs 9,641 crore over the 18 months through March 31, 2020, the agency pointed out.

“The liquidity will also be supported by the planned equity infusion and lean working capital cycle.”

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