Govt’s real telecom pain starts now with likely defaults

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Published: November 22, 2018 12:48:37 PM

Top telcos are staring at the possibility of getting rated as ‘junk’, others are finding it tough to pay spectrum dues.

Indian telecom sector was in the ICU even before RJio started commercial services.

Thanks to the brutal price war unleashed by RJio, and the exceptionally high government levies – both the annual license fees as well as spectrum costs – the telecom sector has been slipping into a deeper morass with each passing quarter; RJio starting a bruising price war accelerated the problem, but the sector was in the ICU even before RJio started commercial services. As a result of the price war, for the industry as a whole, after rising from Rs 131,602 crore in 2011 to Rs 198,206 crore in 2016, the sector’s gross revenues are estimated at Rs 142,789 crore this year. And, as a result, revenues accruing to the government have fallen by around 37% in just the last two years, to a likely Rs 36,291 crore this year from Rs 57,673 crore in 2016. While around a third of this took place due to lower annual licence fees and spectrum charges due to the industry’s revenues falling, two-thirds was due to the fact that, with no auctions in 2017 and 2018, the government didn’t get any upfront money in those years – as per the terms of auctions, an upfront payment is made in the year of the auction, and the balance is spread out after a moratorium of a few years.

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If this isn’t bad enough, a lot worse could lie ahead, not just for the telcos, but also for the government and the banks it owns. For one, with no auctions likely for another few years, annual revenues from the sector will continue to remain low. And, apart from the money these telcos owe banks – Rs 2.5 lakh crore from Credit Suisse – they are likely to face a problem in paying even the deferred auction amounts. While The Economic Times has reported that Vodafone Idea chairman Kumar Mangalam Birla met finance ministry officials to seek a deferral of the next payment his company has to make, Bharti Airtel is also in poor financial shape, and was put on ratings watch for a downgrade to junk by ratings agency Moody’s earlier this month.

While Vodafone Idea has to pay Rs 2,645 crore per quarter in terms of deferred spectrum fees, its EBITDA has fallen from Rs 1,502 crore in Q2FY18 to Rs 461 crore in Q2FY19 and with EBIT losses quadrupling to Rs 2,545 crore in Q2FY19 compared to an interest cost of Rs 1,951 crore, it has a negative interest cover; its depreciation and amortization costs in Q2FY19 were Rs 3,006 crore. Bharti Airtel has to pay deferred spectrum costs of Rs 1,394 crore and its India EBITDA has fallen from Rs 6329 crore in Q2FY18 to Rs 4249 crore in Q2FY19. With a Q2FY19 depreciation and amortization of Rs 4,476 crore, it had a negative EBIT in Q2FY19 as compared to Rs 2,494 crore in Q2FY18. Things will improve for Vodafone Idea and Bharti Airtel once Indus Towers is sold, and Vodafone Idea is also betting on considerable opex savings after the merger but, by and large, the danger of default is severe. According to Credit Suisse, all the sector’s debt has an interest cover of less than one, and that was in Q1FY19; since then, things have only got worse.

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In which case, if the government is keen to avoid a massive ramp up in bank NPAs, it needs to quickly rationalize annual charges like license fee as well as the exorbitant spectrum charges. By way of example, Trai has just put a reserve price of Rs 492 crore per MHz of 5G spectrum despite the fact that, a few months ago, 5G spectrum was auctioned for Rs 130 crore per MHz in South Korea where subscribers pay much higher monthly fees than in India. And, thanks to Trai’s illogical pricing, on average, 38% of all spectrum put on auction since 2010 has remained unsold; the figure was as high as 67% in 2012, 100% in 2015 and 59% in 2016. Unsettled by the suit-boot-ki-sarkaar jibe, particularly since he has run his government on a zero-corruption plank, prime minister Narendra Modi has not been able to do anything about this in the last four-and-a-half years; but now, he has no choice with the industry readying to default.

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