Telecom sector to witness rising debt and consolidation, says India Ratings

With increase cost of spectrum acquisition and heavy cash need for setting up of infrastructure for mobile internet amid lower profitability, Indian telecom sector is expected to witness consolidation and rising debt, said India Ratings and Research (Ind-Ra).

"Ind-Ra notes that Idea's purchase of the spectrum is at a significant premium (98%) to the last auction discovered price of similar spectrum. In case the other telecom players also tend to acquire spectrum at a substantial premium, the debt levels in such companies could increase further," said Rakshit Kachhal, senior analyst with Ind-Ra in a report.

Idea Cellular Ltd last week agreed to buy 1800 Mhz spectrum in two circles-Gujarat and Uttar Pradesh (West) from Videocon Telecommunications Ltd for Rs. 3,310 crore in order to provide 4G services to compete with Reliance Jio, Airtel and Vodafone. Idea has gross debt of Rs 23,540 crore as of September 2015.The current deal can potentially increase the total debt of the company by over 10%.

Apart from spectrum acquisition, the telecom sector is witnessing increasing competition in the data space and is likely to take on additional capex to sustain growth. At the same time, cash returns from such investments will be back ended as 4G revenue will gain significance over the next three to five years and therefore could be credit negative in the short term, Kachhal noted in the report, saying it would lead to consolidation in the industry.