ICRA cites better liquidity, timely payments in telecom sector upgrade

Credit ratings agency ICRA has revised its outlook for the Indian telecom sector from negative to stable, citing improved financial discipline across telecom operators. A key factor behind this upgrade is the timely payment of dues by telecom companies, particularly Vodafone Idea (Vi), which has made notable progress in 2024.

Vi’s recent efforts, raising capital, implementing tariff hikes, and boosting revenues, have collectively improved its cash flow and eased its financial burden in the short term. Furthermore, the company has been allowed to convert a portion of its government debt into equity, offering further relief.

In contrast, Reliance Jio and Bharti Airtel, which already have stronger balance sheets than Vi, have consistently met their payment obligations. The average payment cycle for receivables has improved, reducing from around 80 days to approximately 45–60 days. This improvement indicates not only enhanced liquidity management but also a broader recovery in business performance across the sector.

Looking ahead, ICRA projects that the Indian telecom sector’s operating revenue will grow by 4–6% in FY2026. Operating margins are expected to remain healthy, in the range of 70–75%. According to ICRA,“The improvement in collections has eased liquidity stress in the sector, reduced reliance on external debt, and is expected to improve return metrics going forward.”

Telecom companies have also reduced provisioning requirements and improved working capital management, leading to a significant increase in cash reserves. ICRA estimates that the sector’s cash balance will rise to between Rs 5,500 crore and Rs 6,000 crore, more than double the previous range.

“A major factor in easing the working capital cycle has been an improvement in the credit profile of key telecom service providers, who are the main clients of tower companies,” said Ankit Jain, Vice President and Sector Head, Corporate Ratings at ICRA.

A significant amount of past dues has now been paid, he continued, enabling businesses to undo FY2023 provisions. This has improved overall liquidity and cash flows even more. ICRA anticipates that collection processes would stay within 60 days going forward, preserving a strong position for receivables.

It is also anticipated that this improvement will lessen the industry's reliance on borrowing. By FY2026, ICRA predicts that net external debt to operational profit (OPBDITA) will have moderated to about 3.4 times.

Many telecom service providers are projected to resume capital expenditure (capex) projects as a result of recent financing efforts and improved credit profiles. This is consistent with India's ongoing spike in demand for data services, which is propelling telecom companies to continuously update and expand their networks.