The selective bidding strategy for the just concluded 3G auctions will hardly give any respite to the balance sheet of telecom firms. The licence and spectrum fee will have a negative impact on the credit metrics of most operators in the short to medium term, say credit rating agencies. Assuming the operators fund their auction fee through debt, their financial leverage can accordingly be expected to deteriorate, they say. “We will be concerned if the transactions are funded via debt or equity/cash. If it is via debt then the capital structure of telcos will be impacted over short to medium term. Also, if this debt in short term, then the credit profiles of telcos will deteriorate further,” said ICRA senior VP Vikas Aggarwal.
According to credit rating agencies, most of telcos have lined-up or are in the process of raising debt to the tune of Rs 5,000-7,000 crore. With this, telcos who were expecting Ebitda break-even in the next 3-4 years, got further pushed back to 5-7 years.
According to a recent report by Fitch Ratings, the high up-front licence and spectrum fees would significantly raise net debt levels for most of the telcos. Net debt to operating Ebitda ratio of most of the telcos will rise between 1 to 2.5 times. This is likely to go up further after India begins a separate broadband wireless access (BWA) auction, scheduled to start on Saturday,” said Fitch Ratings analyst Abhinav Goel.
The considerable delay in the start of the auction and the ongoing tariff war has led to drastic change in telcos position in the Indian market. Further, the declining Arpus have slowed the industry’s profit growth. “Amidst these difficult times, most of the operators raised heavy debt to fund their purchase of 3G spectrum which has put a strain on their capital structure. Moreover, the operators will have to incur additional expenditure for the roll out of these services which will further impact their already declining margins, said Gaurav Dixit from CARE Ratings.
As per Cisil Ratings, these investments will primarily be debt funded, and the players’ financial risk profiles will be under pressure over the medium term. “Of four telcos that we track, around 80% of 3G fee will be debt funded. However, this pressure will be offset by strong cash flows from the players’ pan-India operations, and in a few cases, by support from parents,” said Pawan Agrawal, director, Crisil Ratings.
The 3G spectrum on 2.1Ghz bundled with the 3G licence will be allotted to the winners during the second half of financial year 2010 (by September 2010). This would ensure potential for higher non-voice revenues to offset declining average revenue per user in the medium to long term; and, second, the additional spectrum allocation of 5Mhz each (compared with 4.4Mhz to 9Mhz currently for 2G operators) to provide a competitive edge over other telcos in terms of higher network capacity and better service capability.