Moody's: Spectrum wins stretch India telco operators' balance sheets further, a credit negative

Moody's Investors Service says that the resulting high costs for spectrum -- following an auction on October 7 -- is credit negative for India's telecom operators, as the debt levels of their already stretched balance sheets will rise further.

"At the same time, competition is intensifying, following the September launch of mobile services by new operator Reliance Jio Infocomm (unrated), a subsidiary of Reliance Industries (RIL, LC: Baa2 positive; FC: Baa2 stable)," says Annalisa Di Chiara, a Moody's Vice President and Senior Credit Officer. "The higher debt levels following the auction and lower profitability from pricing pressure will likely raise industry-wide leverage."

Bids for the four largest telecom operators aggregated 1157 MHz of spectrum, 31% of the spectrum available for sale across all bands. Not unexpectedly, the 700MHz band -- the most expensive category of airwaves -- went entirely unsold.

"In our view, 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 (Baa1 stable)," says Di Chiara. "The operators will experience a reduction in their ability to fund further expansion or to absorb the effects of weaker profitability as competition intensifies".

The auction did not attract any bids for the highly expensive 700 MHz band, implying that Reliance Jio Infocomm Limited (unrated) and Reliance Communications Limited (Ba3, review for downgrade) -- 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 centers, given its better in-door coverage.

More intense competition, in part spurred by Jio's launch, is likely to drive tariffs lower, causing 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.

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% or 50%, depending on the spectrum band, within 10 days of the auction's close, with the balance payable in 10 annual installments 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 recapitalization events and further industry consolidation, which will in turn ultimately benefit those incumbents well positioned in 4G.

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