When India’s top telecom company, Bharti Airtel features in Credit Suisse’s list of stressed companies, with an interest cover (Ebit-to-interest) of less than one, you realise just how financially stressed the telecom sector is. With an interest repayment obligation of Rs 2,550 crore in Q1FY19 and an Ebit of Rs 1,581 crore, Airtel’s interest cover is a mere 0.6. Idea, which has just got final clearances for its merger with Vodafone, had a negative Ebit in Q1, so its interest cover is much worse (see graphic).
Indeed, according to Credit Suisse, all telecom debt in the country is owed by companies that have an interest cover of less than one; that is a pretty scary thought for the country’s banks. This ratio of 100% today was 55% just a year ago and 35% two years ago in Q1FY17.
With the industry’s health falling so dramatically, the impact on government revenues is also significant. 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 of this, 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 as the industry’s revenues fell, 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.
This source of government revenue is likely to keep declining since, given the state of the industry’s finances, it is unlikely there can be an auction next year either; whether it takes place in 2020 will depend on whether things pick up. Even more worrying for the government—apart from the hit that government-owned banks will take when telcos go belly up—is the ability of telcos to make good their spectrum payment obligations from earlier auctions. Between Vodafone and Idea, for instance, Rs 10,579 crore has to be paid to the government each year from now to 2030, with a small dip in 2031. In FY18, however, their combined Ebitda earnings were just Rs 13,803 crore; while that is sufficient to pay for the spectrum, the Ebitda has to be used to make good interest payments on other debt as well as for amortising spectrum purchases. While the hope is that earnings will pick up, how quickly this will happen is not clear since, a year ago, the Ebitda earnings for the two telcos was Rs 22,017 crore; of course, once the two merge operations, there will be operational synergies and that will drive up Ebitda. Once Indus Towers is sold, Airtel, Vodafone and Idea will also be able to retire some part of their non-government debt with the proceeds.
All this, of course, presupposes telcos will not buy any more spectrum; should this happen, the equation becomes even more precarious. Amazingly, despite the sector’s fragile finances, the telecom regulator, Trai, talks confidently about the rollout of 5G services soon. Indeed, Trai continues with its policies of outrageously expensive spectrum due to the fact that, by and large, it uses the bid value of the last auction as the reserve price for the next. It does not make any adjustment for the fact that telcos may have bid exuberantly in the past, as they did when 3G technology came or due to the fact that, more often than not, the government puts too little spectrum on auction.
This time around, Trai has put a reserve price of Rs 492 crore per MHz of 5G spectrum despite the fact that, just last month, this was auctioned for Rs 130 crore in South Korea where subscribers pay much higher monthly fees than in India. 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. Given that the government has given the Trai chief an extension, though—this is unheard of since regulators, by law, are proscribed from getting government jobs after their initial tenure—it would suggest it doesn’t feel he is in any way responsible for the sector’s mess. And since the government has not done anything in the last four years, it is not clear it will make any meaningful cuts in the revenue-share it takes from the sector either—even without including GST, the government share of telecom revenues rose from 12% in 2011 a likely 25% this year. Once the darling of investors, the sector is today on its last legs.