Pain to linger as telcos reel under debt
Mumbai: As of 30 September 2016, Indian telecom companies were weighed down by heavy debt.
Bharti Airtel Ltd had a total consolidated debt of Rs98,813.50 crore, Idea Cellular Rs37,942.30 crore, Reliance Communications Ltd Rs32,371 crore, Mahanagar Telephone Nigam Ltd Rs12,789.31 crore, Tata TeleServices Ltd Rs10,223.17 crore and Tata Communications Ltd Rs10,211.58 crore.
Idea Cellular and Vodafone India will have a combined debt of Rs1.08 trillion.
The combined net debt of the top four telcos (including Reliance Jio Infocomm Ltd) could increase by 35% in fiscal 2017 and further by 12% in fiscal 2018.
In addition to the upfront spectrum payout in fiscal 2017, network capital expenditure (capex) needs to be ramped up, which will keep the free cash flow negative in fiscal 2017.
India Ratings and Research Ltd analysts also expect an earnings before interest, tax, depreciation and amortization (Ebitda) margin deterioration of 400 bps (one basis point, or bp, is one-hundredth of a percentage point) in fiscal 2018, but the pricing strategy of RJio would be the key decider on the margin trajectory, they say.
To be sure, telecom companies are trying to reduce the debt overhang by selling stakes or assets.
On 28 March, for instance, Bharti Airtel said it had sold a 10.3% stake in its tower company, Bharti Infratel Ltd, to a consortium of funds to raise Rs6,193.9 crore. The consortium of funds includes private equity firm KKR and Co. LP and Canada Pension Plan Investments Board (CPPIB). After this transaction, the stake held by KKR and CPPIB (combined) will be the single largest public shareholding block. “Bharti Airtel will primarily use the proceeds from this sale to reduce its debt,” the company said in a statement.
In December, RCom approved the sale of its tower operations to Brookfield Infrastructure Partners for $1.6 billion, which will help the company reduce its debt by 70%.
In January, RCom signed a definitive agreement to buy Sistema Shyam Teleservices Ltd (SSTL) in a deal valued at Rs4,500 crore and payments towards spectrum allotted to SSTL. Following the deal, SSTL acquired a 10% stake in RCom worth Rs2,082 crore. RCom is also merging its wireless business with smaller rival Aircel and has said the deal will help reduce its leverage as it transfers part of its debt to the new venture.
RCom also signed a spectrum sharing and trading agreement in April with RJio for the 850MHz spectrum band.
The other possible monetization opportunity lies with Idea (9,772 towers), which is in talks with ATC Tower Corp., analysts note.
Vodafone India and Idea Cellular, which are merging, also intend to sell Idea’s 11% stake and Vodafone India’s 42% stake in India’s largest independent tower company, Indus Towers Ltd, which is a joint venture between Bharti, Vodafone India and Idea.
Such a sale, Fitch Ratings says, would help reduce the debt at the Vodafone India-Idea combined entity.
However, according to FitchRatings, “the sale will not be sufficient to ease RCom’s financial stress, given its high indebtedness and plan to merge its wireless operations with Aircel Limited; we do not foresee funds from operation-adjusted net leverage reducing to below 4.5x for the foreseeable future.”
FitchRatings continues to have a “negative outlook” on the Indian telecom sector “as competition will continue to remain high, and consolidation is not likely to return any pricing power to the operators in the near term. The entry of Reliance Jio has accelerated industry consolidation”, the report notes.