Telecom: Till debt do us part

Launch of 3G services will take a toll on balance sheets, with earnings already being revised downwards.

The Rs 67,700 crore coughed up by telecom companies for 3G licences could be a choker on their balance sheets, the cure for which is not in sight for at least a couple of years. The listed companies are likely to feel the pain of interest and amortisation costs. Analysts have already started to rework earning estimates downwards.

From a positive cash and negligible debt position, Bharti Airtel could see its debt burden grow. Without considering the Zain acquisition, the net debt to equity is estimated to rise to 0.10 times; if the $8.3-billion acquisition is factored in, the debt will be around 2.4 times the earnings before interest, tax, depreciation and amortisation (Ebitda). With average revenues per unit (Arpu) down more than 20 per cent over the year, servicing this debt will be a challenge. The situation will be worse for Reliance Communications and Idea, as their debt to Ebitda ratio is around 4.3 times and 3.1 times, respectively, according to analysts.

Moreover, this does not consider the broadband wireless access (BWA) auctions and the currently-disputed extra payments for 2G spectrum. The former could see an additional burden of Rs 23,800 crore.

Though, each player is betting on some potential advantages. For Bharti, the 3G coverage will be in its top-six markets, which accounts for 54 per cent of its revenues. Moreover, Bharti is a leader in terms of Arpu, and the high-end Arpu users are likely to form the biggest segment amongst 3G subscribers.

Idea expects to gain from the fact that 3G will cover 79 per cent of its revenue footprint and 49 per cent of all-India revenues, say analysts. It will also gain from operational efficiencies, as it has the most contiguous footprint.

Reliance Communications will have an extremely diverse strategy for metros and the ‘C’ circle. Metros form 77 per cent of the spectrum payout for the player and account for just 24 per cent of its revenues.

Also, with new players ready to take on the incumbents, the warzone in the telecom sector is set to intensify; the estimated earnings growth rates, hence, been worked downwards.