The recently concluded spectrum auctions saw India’s top three telcos – Bharti Airtel , Vodafone and Idea Cellular – not just win back spectrum in all the circles where it was expiring but also grab some additional chunks. While the trio has had to cough up a lot of money for this, they also got spectrum for 20 years. Additionally, the spectrum they already hold beyond this does not come up for renewal in the medium term. Consequently, CRISIL expects these telcos to consolidate their market position and strengthen business-risk profiles.
To be sure, debt will bloat, which will have a bearing on the financial-risk profiles of operators. And revenue gains required to entirely offset the high payout will be a challenge in the face of intensifying competition (refer to CRISIL release, ‘Telcos need 5-paise ARPM gain to offset spectrum cost’, dated February 16, 2015). But for the top three, there are offsets available – such as rapid growth in data revenues boosting cash accruals, and equity infusion or divestment of non-core assets. In the near-term, though, their capital structure will be impacted.
The auctions garnered about Rs.1100 billion revenue for the government (of which Rs.290 billion is immediately payable). This is above CRISIL’s pre-auction estimate of Rs.900 billion because of higher-than-expected pricing multiple in the 900 MHz band, and unanticipated interest in the 800 MHz band. The 900 MHz band saw very aggressive bidding with multiples of over 2 times, against CRISIL’s expectation of 1.5 times, but the troika spent close to our expectations. The 800 MHz band, which was primarily used for voice services by CDMA technology-based operators, saw robust bidding given its potential for high-speed data services. Operators picked up 1800 MHz and 2100 MHz airwaves in some circles to augment existing network and expand 3G offerings. Of the total spectrum sold, nearly two-third was won by the three telcos who between them account for 70 per cent of industry revenue.
The acquisition of additional airwaves in the 900 MHz and 2100 MHz bands will enable telcos to improve the quality of their data services. Decongestion of existing networks, better user experience and opportunity to consolidate market position in circles where they acquired 900 MHz airwaves for the first time will further strengthen the business-risk profiles of the three telcos.
As for debt, CRISIL estimates their combined debt/EBITDA will have shot up from 3.3 times as on March 31, 2014, to 3.9 times by March 31, 2015. Spectrum-winning operators are expected to opt for deferred payment to the government, which is convenient because the first tranche will be due only in 2018 and the rest in 10 annual tranches thereafter.
The ability of telcos to increase their ARPM will be a key monitorable.
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