New Delhi: The winners of the auction for high-speed, third-generation (3G) mobile spectrum that came to a close on Wednesday now face the challenge of having to finance their purchases, apart from paying for the expense of rolling out services.
With total bids ending at close to Rs70,000 crore, double the government’s estimate, the companies need to find the cash in the midst of a savage tariff war that’s squeezing margins as average revenue per user declines.
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“Most of the funding will be through domestic debt and bridge loans, which will then be refinanced,” said an analyst working with a Mumbai-based brokerage firm. “There is not much else that the firms can do given that there are only 10 days for the winners to pay.”
While short-term loans will tide over immediate needs, refinancing may prove less easy.
“Everyone will look at financing the debt as no one is generating enough cash to pay off these huge sums to be able to pay the money from their own accruals,” said Shobhit Agarwal, director with Protiviti Consulting Pvt Ltd. “They would generally try and pay around 40% from their own accruals and the rest would be refinanced. The high amounts will mean that paying back will take time.”
India’s central bank will keep liquidity ready to help the banking system cope with cash outflows.
“I want to assure you that we are taking into account... we are monitoring the liquidity situation,” Reserve Bank of India (RBI) governor D. Subbarao said after an RBI board meeting in the southern city of Thiruvananthapuram.
Subbarao did not provide any details about specific steps the central bank might adopt to manage liquidity. He also did not comment on whether government borrowing would be reduced because of the higher-than-expected 3G auction proceeds.
According to a State Bank of India official, funding will not be a problem given liquidity available in the system.
The chairman of a large public sector bank said companies had already approached banks and approvals have been made in most of the cases and awaiting disbursals. Further loans will be made based on the business plans of the telcos.
“We will keep the licences as assigned (pledged),” said the bank chairman, who did not want to be named.
The banking system has adequate liquidity, said the chief financial officer of a foreign bank on condition of anonymity. “Not all telecom companies will come to the banking sector, they will also draw from their internal accruals.”
Going into the auction, Vodafone and Aircel were the best-positioned companies, said a Mumbai-based analyst on condition of anonymity.
“Vodafone (Essar Ltd) had no acquisitions (such as Bharti Airtel Ltd) or major expansions (like Idea Cellular Ltd). Aircel went into the auction with Rs8,400 crore from its tower sale while all the others have to borrow from domestic banks like State Bank of India, Punjab National Bank, Canara Bank, Bank of India and Bank of Baroda who made available a line of credit to the operators based on their profitability,” he said.
Bharti, India’s biggest phone company, won 3G spectrum in 13 circles, bidding Rs12,300 crore, the most any company will have to pay. The circles account for 68% of its total mobile revenue and 65% of its subscriber base.
“We expect the company to raise debt of Rs8,000 crore. The company has indicated that the capex for 3G services will be marginally above the announced capex of $1.8 billion for the fiscal year 2011,” Amit K. Ahire, analyst with Ambit Capital Pvt Ltd, wrote in his report on the 3G results. As of March 2010, Bharti had a cash balance of Rs7,700 crore as well as debt financing from the Zain acquisition.
Ganesh Duvvuri and Devyani Javeri, analysts with Edelweiss Securities Ltd, lowered their earnings forecast for Bharti by 3.5% as they had earlier assumed an outflow of Rs8,000 crore. They lowered their forecasts for Idea by 11% and for Reliance Communications Ltd (RCom) by 4.5%.
Bharti, Vodafone Essar and Idea also have the option of listing their joint venture tower arm, Indus Towers. Bharti could also list its own tower arm Bharti Infratel if the need arises and the financials of the tower firms allow it, Manik Jhangiani, Bharti group’s chief financial officer, said last month.
Bharti has also been given a line of credit worth Rs18,000 crore for the auction of 3G and BWA spectrum.
RCom has got spectrum in 13 circles, bidding about Rs8,600 crore. The circles where RCom has won accounts for 55% of its total mobile revenue and 49% of its total subscriber base. “In order to fund this, RCom will need to raise further debt of Rs6,500 crore, in our view. This will result in gross debt going up to Rs317 billion, which will further put a strain on the balance sheet,” wrote Ahire.
An Rcom official said the firm was looking into a number of options and funding plans had not been finalized.
Idea Cellular has won spectrum in 11 circles, bidding around Rs5,770 crore. The circles where Idea has won account for 80% of its total mobile revenue and 45% of its total subscriber base
“We expect Idea to raise debt of Rs4,500 crore. This will take total debt to Rs12,300 crore,” Ahire wrote.
“There are no separate funding plans for 3G. A year ago, we had already put in place a line of credit with our banks,” said Sanjeev Aga, managing director of Idea Cellular Ltd.
While announcing quarterly results, Aga had said the board had approved raising up to Rs9,500 crore, of which about Rs7,000 crore had already been tied up with the company’s lenders. Further, about Rs500 crore, which Idea had lent to Indus Towers, is expected to be repaid by May.
Vikram Limaye, member on the board of IDFC Ltd, the infrastructure financing firm, which is involved in lending consortiums for three leading telecom players, said the financial closure is already in place. These entities have “solid cash flow” streams and have a mix of short-term and long-term loans in place to fund their spectrum acquisition.
Vodafone Essar, which has won spectrum in nine circles, will see a cash outgo of more than Rs11,500 crore from its balance sheet. State Bank of India tied up a loan of around Rs10,000 crore in May last year towards 3G spectrum for the Ruias-owned telco.
State-owned Bharat Sanchar Nigam Ltd, which has cash reserves of around Rs35,000 crore, will have to pay a little over Rs10,000 crore for 3G spectrum across the country (excluding Delhi and Mumbai, where Mahanagar Telephone Nigam Ltd is present). MTNL will have to pay Rs6,564 crore out of the reserve funds it has of Rs12,000 crore.
Graphic by Yogesh Kumar / Mint
Anita Bhoir and Anup Roy in Mumbai, and Reuters contributed to this story.