Telecom: Concerns deepen

After 3G auctions, analysts worried over the likely rise in debt and pressure on margins

The 3G auctions ended on the 34th day with a few surprises, mostly negative, leading markets to again focus on the stress being faced by the the telecom sector. While there was no pan-India winner, Bharti, Reliance Communications (RCom) and Aircel (one of the surprise elements) got spectrum in 13 circles out of the 22 on offer. Vodafone, Idea and Tata Docomo got spectrum for nine circles each.

A fragmented picture of the 3G spectrum space is the key pressure point for the sector, as against expectations that it will be consolidate things. An HSBC research points out that the pressure on voice rates is likely to continue. Given that 3G use still has a limited following in proportion to total telecom subscribers, there will be a thrust on getting more customers on board. This will put more pressure on data pricing, says Macquarie’s telecom analyst Shubham Majumder. He adds the sector is unlikely to see any meaningful increase in data revenues over the next two years, as in the near term, 3G will only cannibalise 2G-led revenues from existing high-spend users. Additionally, once mobile number portability comes into the picture, there will be more pressure on voice rates.

The lack of pan-India spectrum will hurt Bharti, given that it has lost out on some key circles like Gujarat and Punjab, points an HSBC research report. The nine circles where it hasn’t got spectrum contribute about a third to its wireless revenues. The extra five MHz spectrum would have also helped ease the overburdened 2G networks (in some circles).

With the final tally indicating that Bharti will be paying Rs 12,300 crore for its haul, RCom Rs 8,585 crore and Idea Rs 5,769 crore, expect the companies’ balance sheets to get stretched. The net debt/earnings before interest, tax, depreciation and amortisation for Bharti is seen rising from 0 to 0.6, for Idea from 1.9 to 2.9, and for RCom from 2.5 to 3.7, according to HSBC research. This, in turn, raises the risk of equity dilution and an estimated earnings dilution of eight per cent for the sector.

The oversold sector saw some respite from relentless pressure after the auction results. However, the sense is that there will be downward earnings revisions. Not surprisingly, after opening with a gap-up, the share price of the three listed mobile service providers slipped on Thursday.

With contributions from Sunaina Vasudev and Ujjval Jauhari