The debt burden arising from the coming 2G telecom spectrum auction and the refarming of the 900 MHz auction in 2014 would hit the balance sheets of telecom operators. However, the country’s top three operators — Bharti Airtel, Vodafone and Idea Cellular —need not lose sleep over this. It’s only financially stretched operators such as Reliance Communications, Aircel, Tata Teleservices and Telenor that would be hit.
This is because unlike the 3G spectrum auction, in which the entire bid amount was paid upfront, for the coming 2G spectrum auction, operators have to pay only a third of the bid amount upfront, while the remaining amount would be paid in 10 annual instalments beginning December 2015. For an operator that secures spectrum in all 22 circles at the reserve price of Rs 14,000 crore, the upfront payment would be Rs 4,620 crore. After a two-year moratorium, annual payments of Rs 1,996.4 crore would have to be paid through the next ten years.
The actual amount might be lower, as few operators are likely to bid for spectrum in all 22 circles. For instance, Idea Cellular is likely to bid for spectrum in only seven circles where its licences were cancelled by the Supreme Court, while Bharti Airtel and Vodafone may bid for spectrum in metros and a few circles where they held spectrum earlier. “I expect operators to be selective about the circles where they bid for spectrum,” says Sivarama Krishnan, executive director (risk advisory services), PricewaterhouseCoopers India.
This, coupled with the staggered payment schedule, would suit the top three mobile operators, given they have better financials and cash accruals. “Even if the incumbents bid aggressively for 2G spectrum, the impact on their balance sheets would be muted, as only 33 per cent of the payment is required to be made upfront,” said Alok Ranjan, head (portfolio management service) at domestic brokerage Way2Wealth. “The rest of the payments, through 10 years, would help them use their internal accrual and avoid huge debt on their books,” he added.
In FY13, Bharti Airtel is expected to generate free cash flow of about Rs 11,000 crore (net of capital expenditure) at the consolidated level, according to an estimate by Emkay Global. For Idea Cellular, the figure is estimated at Rs 1,200 crore. In FY12, Vodafone India generated free cash flow of about Rs 5,700 crore. This provides a financial cushion to the top three operators to absorb the burden of the 2G spectrum auction.
This cushion, however, is not available to operators such as Reliance Communications and Tata Teleservices, which are struggling with declining profitability and low or negative cash flows from operations. (See chart).
The industry is lobbying for a similar payment schedule when 900-Mhz spectrum is refarmed from 2014. “We are not against refarming. We are requesting the government to minimise the financial blow to the industry by allowing a staggered payment schedule,” says Rajan S Mathews, director general, Cellular Operators’ Association of India, a lobby group for GSM operators.
According to an industry analyst, the one-time cost of refarming for incumbent national GSM operators such as Bharti Airtel is likely to be at least Rs 25,000 crore. “The potential financial burden from spectrum refarming is likely to be many times the cost of the 2G spectrum auction,” says a telecom analyst with a leading brokerage in Mumbai. This is because refarming the 900-MHz spectrum could force many operators to switch their network to the 1,800-MHz band, which is less efficient and requires greater investment in equipment and operations. The initial blow could, however, be mitigated if the government offers the option of deferred payments.
Some experts also say bidding for the 2G spectrum auction, as well the refarming, could be less aggressive than that seen during the 3G spectrum auction, leading to lower cost of spectrum. “This is very likely, given the financial stress in the industry. Operators are likely to avoid all-out competition for spectrum at the national level,” says Sivarama Krishnan. According to PricewaterhouseCoopers, as of March-end, the total debt burden on telecom operators stood at about Rs 185,000 crore, with only four of the 11 operators recording net profits.
(With inputs from Abhineet Kumar)