Delay in new rule raises pressure on Indonesian taxi firms: Fitch

Credit metrics of conventional taxi operators to get worse.

The Indonesian Ministry of Transportation's decision to delay the enforcement of a new regulation on application-based transport service providers may increase operational uncertainty for conventional taxi operators and exert further pressure on their credit profiles, Fitch Ratings says.

The new regulation (Permenhub No. 32/2016) came into effect 1 October 2016, but the transport ministry in late September issued a circular that said the rule will only be enforced from 1 April 2017. The regulation is intended to put transport apps on a level playing field with conventional taxi operators, such as PT Express Transindo Utama Tbk and PT Blue Bird Tbk.

The six-month delay was to give the app-based transport service providers more time to conform to additional requirements, such as having proper public-transport certifications on every vehicle and every driver having licenses to operate public transportation vehicles, according to a ministry spokesperson. The delay increases business and operational risks for conventional taxi operators, which are already under pressure from weaker demand for their services.

Fitch expects the operating cash flow of conventional taxi companies to further weaken in the next 12 months, either via a decline in revenue or longer working capital days. Express' EBITDA in 1H16 fell by 40% yoy and EBITDA margin shrank to 43.7% from 53.5% from a year earlier. Similarly, Blue Bird's EBITDA declined by 23% yoy in 1H16, and EBITDA margin fell to 29.8% from 35.9%.

Express' situation is exacerbated by the large proportion of its drivers who are under a fixed daily rental scheme; these drivers have found it more difficult to make payments to Express as their revenues have declined due to weakening demand. Thus, Express' receivable days have increased to 197 days in 1H16 (using EBITDA for the last 12 months) from 135 days in 2015 and 98 days in 2014. Receivable days are likely to lengthen as application-based transport service providers become more entrenched and increase competition for commuters.

As a result, Fitch expects the credit metrics of conventional taxi operators to worsen in the next 12 months. Express' leverage, measured by net debt to EBITDA for the 12 months to June 2016, jumped to 3.8x from 2.9x at end-2015, while Blue Bird's leverage slightly worsened to 1.0x from 0.9x over the same period. Interest coverage, measured by EBITDA to interest expense, also deteriorated. Express' interest coverage fell to 1.8x at end-1H16 from 2.5x at end-2015, while Blue Bird's coverage down to 6.7x from 8.5x over the same period.

Fitch views that application-based transport service providers are likely to continue to disrupt conventional business models in the taxi industry in the medium term despite the new regulation, as Fitch believes that the enforcement of the regulation will be challenging.