Telefónica's challenges in Peru

Telefónica del Perú faces problems stemming from competition, inflation and unfavorable supreme court rulings in a context of controversies related to tax issues.

Fitch downgraded the company’s rating to 'BB' from 'BB+' on Monday, expecting its market position to deteriorate due to the rulings.

The supreme court sided with tax authority Sunat. Local media reported the rulings imply obligations of around US$854mn, while Fitch wrote the company’s balance sheet involved total provisions for income tax liability of 2.8bn soles (US$726mn) as of September 30.

In a statement, Telefónica said that "although the company has made sufficient provisions over time in relation to these processes, the impact of the decisions is still a matter of evaluation and must be subject to liquidation by Sunat."

It also wrote that the amount of the disputes "has been increased exponentially due to the interest generated by the delay, not attributable to the company, of almost 20 years in the processing of the disputes." This delay led to the amounts involved comprising 80% interest and fines.

Fitch expects that Telefónica will have to seek additional financing and capital contributions to meet its obligations, which will affect the company's financial profile.

Additionally, fierce competition forces the company to increase investments, while political instability and inflation also hit the economy. Competition increased after Entel and Bitel entered the market. With a market share of around 30%, Telefónica is in a technical tie with Claro.

Telefónica’s decision to reduce its exposure in the region has also increased cost pressure in the Latin American operations.

Revenues for January-September 2022 reached 5.36bn soles, corresponding to 36.7% of overall telecoms revenues. However, the revenues of its main competitors grew faster, according to latest numbers by regulator Osiptel.

Private investment agency ProInversión resumed a 4G tender that had to be suspended last year and for which Telefónica prequalified.

Although still dominant, Telefónica’s share in the fixed market has been declining in favor of fiber optics providers. As of September, Telefónica accounted for 54% of fixed lines.

Fiber investments were increased to swiftly migrate copper cable customers. The company expects to reach 4mn homes passed with fiber in three years.

Fitch expects single-digit ARPU growth in the fixed market and a more stable mobile market, with higher demand for broadband. “Cost containment efforts should result in a modest Ebitda margin expansion.”

Telefónica reduced its operating expenses mainly through lower personnel restructuring expenses and reached an Ebitda margin of 18.9% in 3Q22, compared to 12.8% in the year-ago period, according to Osiptel.