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Spectrum auction may widen inequality between telcos: SP

The News International Team

The ongoing auction of telecom spectrum in India is likely to increase the gap between the country’s top telecommunication companies (telcos) and their smaller peers, according to Standard & Poor’s Ratings Services

Telcos are seeking to win back spectrum where the permits expire soon.

“We believe the three largest Indian telcos– Bharti Airtel , Vodafone India, and Idea Cellular –have manageable leverage and improving market shares, which should enable them to withstand the impact of the auction outgo,” said Standard & Poor’s credit analyst Abhishek Dangra.

The rating agency feels the smaller telecom companies will be unable to hike tariffs for fear of losing their already weak market shares.

“As a result, the smaller players are likely to get further marginalized. Continuing pressure on weaker players could intensify organic consolidation in the sector over the next few years,” the S&P release says.

S&P estimates that the spectrum auction is likely to cost over USD 13 billion even at the base price. The final price may be higher due to aggressive bidding at the auction, it added.

According to the rating agency, such spectrum accounts for 15-70 percent of the revenues of these companies, exposing them to renewal risk. The top four–Bharti, Vodafone, Idea, and Reliance Communications Ltd.–are seeking to win back USD 7 billion (at the reserve price) worth of spectrum, the S&P release says.

S&P expects the the ratio of debt to EBITDA (operating profit) of some companies to be adversely hit because of higher spectrum costs.

Excerpts from the S&P release:

The ratio of debt to EBITDA of Idea, which has the highest spectrum renewal risk, will rise to 3 times because of spectrum-related costs, from about 1.1 times now.

However, the ratio will still be lower than that of most peers excluding Bharti (about 2 times). Reliance Communications’ leverage will further increase to well above 5.5 times from the already-high level of about 5 times despite its lower spectrum outgo.

This is because of the company’s lower EBITDA than that of other large telcos. We expect Vodafone’s leverage to rise to about 4 times from about 3.5 times now. However, the company will continue to benefit from support from its parent Vodafone Group PLC.”

S&P does not expect voice tariffs to decline over the next 12 months. But it sees increased competition in the data segment, with government-owned Bharat Sanchar Nigam Ltd. announcing sharp price cuts and Reliance Jio set to enter the market.

Bharti Airtel stock price

On March 05, 2015, Bharti Airtel closed at Rs 347.90, down Rs 3.25, or 0.93 percent. The 52-week high of the share was Rs 419.90 and the 52-week low was Rs 291.00.

The company’s trailing 12-month (TTM) EPS was at Rs 28.61 per share as per the quarter ended December 2014. The stock’s price-to-earnings (P/E) ratio was 12.16. The latest book value of the company is Rs 166.93 per share. At current value, the price-to-book value of the company is 2.08.


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