Singtel suffers 1st quarterly loss with Bharti Airtel investment through CECA

It was reported by the media yesterday (14 Nov) that Singtel posted its first quarterly loss of S$668 million in its 2Q result ending 30 Sep (‘Singtel posts first quarterly loss of S$668m on Airtel provision‘).

This was primarily due to provision made for huge losses incurred by Bharti Airtel, the Indian telco which Singtel invested in. Excluding Airtel, net profit of Singtel would have been positive, up 4 per cent. Singtel and GIC owned about 40% stake in Airtel.

Airtel was impacted by an adverse Indian court ruling against the telecom industry in India last month. In the interim, Airtel has recorded an exceptional provision this quarter of approximately S$5.49 billion of losses. Singtel’s proportionate share of this provision amounted to S$1.93 billion pre-tax.

The Indian court ruling was finally announced last month after 20 years of legal dispute over air wave fees the Indian telcos need to pay the government. The operators have disputed for years over how the Indian government calculates their annual adjusted gross revenue, a share of which is paid as license and spectrum fees.

With the ruling, the Supreme Court upheld the government’s method, while rejecting the companies’ plea to exclude revenue from non-telecommunications businesses. As a result, Airtel would need to pay the Indian government 217 billion rupees (US$3 billion).

Moody’s downgrades Bharti Airtel which runs up huge debt

In Aug, Singtel already reported a 35 per cent drop in its 1Q net profit largely dragged down by Airtel’s losses. Singtel posted a net profit of S$541 million for the three months ended in June, compared with S$832 million a year ago. So, with the net loss of S$668 million in 2Q, the total net profit of Singtel in the first half of its FY would be negative.

Earlier in March this year, it was reported that Singapore’s GIC will invest Rs5,000 crore (S$972 million) into the troubled Airtel. It came as Airtel decided to announce plans to raise nearly Rs32,000 crore (S$6.2 billion) through a combination of rights issue and perpetual bonds.

The fundraising was to help reduce Airtel’s current massive net debt estimated to be Rs 1.06 lakh crore (S$21 billion) as at end of last year. Singtel has renounced part of its rights to be picked up by GIC. As a result, Singtel’s stake in the Airtel will fall to 35.2% while GIC will own about 4.4% for the first time. In any case, Singtel announced that it will buy roughly 37.5 billion rupees (S$730 million) worth of Airtel stock as part of Airtel’s plan to raise the massive S$6.2 billion in order to cut its huge debt.

Due to the massive debt, Airtel’s credit rating was downgraded for the first time by Moody’s to below investment grade status in Feb. Airtel’s bruising tariff war with India’s newest wireless operator Reliance Jio also continues to hurt its revenue and profitability. “The downgrade reflects uncertainty as to whether or not the company’s profitability, cash flow situation and debt levels can improve sustainably and materially, given the competitive dynamics in the Indian telecom market,” Moody’s said.

Moody’s expects Airtel’s profitability to remain low over the next few quarters. It noted that though the company’s debt levels may decline due to capital raising initiatives, like the one Singtel and GIC had invested into Airtel in March, weaker cash flow generation of the core mobile operations will likely keep leverage elevated. For the first time in the last 15 years, Airtel has generated negative cash flows this year.

No doubt, Airtel’s negative cash flows will surely hurt its earnings, which undoubtedly will drag Singtel’s earnings down further. But Singtel CEO Chua Sock Koong remains positive. She said that notwithstanding the court ruling, “Airtel has made positive strides in the wake of the recent industry consolidation, gaining market share, and increasing mobile service revenue for a third straight quarter”.

Singapore able to invest in India thanks to CECA negotiated by Heng and team

Thanks to the India-Singapore Comprehensive Economic Cooperation Agreement (CECA), Singapore entities like Singtel and GIC are now able to invest in India with less restrictions.

For example, according to CECA information kit, investments into India are not required to seek foreign investment approval generally. Also, investors are allowed to freely transfer funds related to their investments, such as capital, profits, dividends and royalties. CECA also formally recognised Temasek and GIC as distinct entities, and they are allowed to each own up to 10% of a listed Indian company, similar to other Foreign Institutional Investors.

Under CECA, it also enables Singapore and India to trade goods freely, and allows professionals to work in each other country more easily.

Deputy Prime Minister Heng Swee Keat who was then Permanent Secretary for Trade and Industry led the Singapore side to conclude CECA with India after 13 rounds of talks. Heng and his team essentially did the ground work together with their Indian counterparts before presenting their proposals to the politicians for approval.

Areas covered by CECA include: Improved Avoidance of Double Taxation Agreement, Trade in Goods, Customs, Investment, Trade in Services, Intellectual Property, etc.

However, controversial ones like concluding further Mutual Recognition Agreements (MRAs) so as to facilitate the freer movement of professionals between Singapore and India are also present in CECA. It helps to recognise each other’s education and professional qualifications so that Indian and Singaporean professionals could be able to practise in each other country.

Then there are clauses which permit “intra-company transferees” to easily work in each other country. An employee needs only be recruited by a company for as little as 6 months to be considered for transfer. Some politicians may argue that CECA would also benefit Singaporeans wanting to work in India but the question is – how many Singaporeans would want to work there earning in rupees?

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