Singtel's annual net profit down 65.3 per cent thanks to Bharti Airtel investment through CECA

Singtel reported yesterday (28 May) that it has posted a 25.7 per cent fall in net profit to $574.4 million for its fourth quarter ended March 31, 2020, from $773 million a year ago.For the full year ended March 31, net profit was down 65.3 per cent to $1.07 billion, while revenue slipped 4.8 per cent to $16.54 billion.This came as Singtel took a net exceptional charge of $302 million for the 4th quarter, mainly arising from Bharti Airtel's provision for its losses.Operating revenue for Q4 also fell 10.2 per cent to $3.90 billion, from $4.34 billion a year earlier. This was due to lower mobile service and equipment sales revenues across Singapore and Australia.Singtel's full-year profit slumped to its lowest since 1993, according to Bloomberg data. In November last year, the telco had posted an unprecedented quarterly loss of $668 million for the three months (2Q) to Sept 30 ('Singtel suffers 1st quarterly loss with Bharti Airtel investment through CECA').The $668 million losses were primarily due to provision made for huge losses incurred by Bharti Airtel, the Indian telco which Singtel invested in. 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 year. 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

Last March, it was reported that Singapore’s GIC would 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 massive net debt estimated to be Rs 1.06 lakh crore (S$21 billion) as at end of 2018. Singtel has renounced part of its rights to be picked up by GIC. As a result, Singtel’s stake in the Airtel would fall to 35.2% while GIC would own about 4.4%. In any case, Singtel announced that it would 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 by Moody’s to below investment grade status last year. “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 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 last 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 generated negative cash flows last year.No doubt, Airtel’s negative cash flows inevitably also hurt Singtel's earnings one way or another. But Singtel CEO Chua Sock Koong remains positive. Last year, 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”.

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. As part of CECA, 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 would 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 Indian rupees?