The credit outlook for state-run companies and new entrants in the Indian telecom sector is 'negative' in 2011, but well-entrenched private sector players' ability to repay their debts is 'stable', according to a new report by global ratings agency Fitch.

According to the Fitch report, PSU telecom firms are facing margin pressure on account of their high employee costs and weaker balance sheets following the 3G and broadband wireless access (BWA) spectrum auction last year.

However, the 2011 credit outlook for private sector service providers in the Indian wireless market is stable, as per the agency's report.

The stable outlook for incumbent private players in 2011 reflects the agency's expectations that competitive pressure will ease in the wireless voice segment, it said.

It also reflects expectations of continued strong growth in subscriber additions and the peak capex and leverage ratios achieved in 2010 being maintained, it added.

Furthermore, Fitch expects the private incumbents' finances to improve through the sale of stakes in tower businesses, as well as the generation of additional revenue streams from 3G and BWA services and the easing of competitive pressure in the voice segment.

However, the Telecom Regulatory Authority of India's (TRAI) recommendations on refarming 900 Mhz of spectrum, licence renewal fees and payment of a one-time fee for excess 2G spectrum held by telcos, based on 3G prices, would have a moderate-to-large impact on the existing service providers, if implemented, it said.

The report also said new entrants in the Indian telecom market are facing regulatory uncertainties and any harsh action against them will adversely impact their businesses.

In November, 2010, the Telecom Ministry sent showcause notices to certain new entrants in the Indian telecom sector over their failure to meet network roll-out obligations or for bagging start-up spectrum without being eligible for the same.

Should these licenses be cancelled, it would negatively impact the already stretched businesses of these operators and delay achievement of break-even in terms of operating profits and cash flows, the Fitch report added.