Spectrum buying to strain Indian telcos' books further; a credit negative: Moody's

Global ratings agency Moody's on Friday said that high cost spectrum acquired in auction will be credit negative for Indian telecom companies as their debt levels, on already stretched balance sheets, will rise further

The competition is intensifying in the telecom space, following the September launch of mobile services by new operator Reliance Jio Infocomm Ltd (unrated), a subsidiary of Reliance Industries.

Annalisa Di Chiara, a Moody's vice-president and senior credit officer, said, "The higher debt levels following the auction and lower profitability from pricing pressure will likely raise industry-wide leverage."

Bids from the four largest telecom operators aggregated 1,157 MHz of spectrum, in other words 31 per cent of the spectrum available for sale across all bands. Not unexpectedly, the 700MHz band – the most expensive category of airwaves – went entirely unsold.

These spectrum wins will weigh on balance sheets and cash flows, as debt levels will rise materially for most operators, including incumbent Bharti Airtel Ltd (Baa3 stable) and larger international groups, such as Vodafone Group Plc, Moody’s said.

The operators will experience a reduction in their ability to fund further expansion or to absorb the effects of weaker profitability as competition intensifies, Moody’s said.

With the auction not attracting any bids for the highly expensive 700 MHz band, Reliance Jio Infocomm Limited (unrated) and Reliance Communications ltd – which have a spectrum-and-infrastructure sharing agreement – will remain the only players with access to pan-India spectrum in the sub 1 Ghz band. The latter is considered the best suited for 4G services in urban centres, given its better in-door coverage. More intense competition, in part spurred by Jio's launch, is likely to drive tariffs lower.

It may cause average revenues per user (ARPU) to contract and industry revenue and profitability to fall over the next 12-18 months, meaning that leverage levels could rise. Growing demand for 3G/4G data services will continue to drive each company's spectrum cost recoveries, it said.

The operators will likely opt to defer their spectrum payments, mitigating the effect on cash flows. This option requires them to make upfront payments of 25 per cent or 50 per cent, depending on the spectrum band, within 10 days of the auction's close, with the balance payable in 10 annual instalments after a moratorium of two years.

Longer term, the spectrum which the operators secure will help them maintain their competitive positions, support their strategies on data growth and enhance cash flow generation. Their high debt burdens may also pave the way for recapitalisation events and further industry consolidation, which will in turn ultimately benefit those incumbents well positioned in 4G, it added.