What impact will the enormously high bids for 3G (third-generation) spectrum have on the balance sheet of telecom companies? The net debt of each of the three large listed companies in the space, Bharti Airtel Ltd, Idea Cellular Ltd and Reliance Communications Ltd, will soar as a result of the high bids.
Graphic: Naveen Kumar Saini / Mint
Bharti is currently in a net cash position, based on its results for the March quarter, but after the outgo of Rs12,296 crore, its net debt will rise considerably. Bharti’s net debt to Ebitda ratio will rise to 0.7 times, based on its profit for the year ended March. Ebitda stands for earnings before interest, tax, depreciation and amortization. After accounting for the debt required for the acquisition of the African assets of Kuwaiti telecom firm Zain, the company’s net debt to Ebitda ratio will be as high as 2.6 times.
Idea Cellular and Reliance Communications are much worse off. Their net debt to Ebitda ratio stood at 1.7 times and 2.5 times, respectively, before accounting for the 3G spectrum fee. After accounting for the fee, the ratio rises to 3.6 times for both companies. According to an analyst with a foreign brokerage, a debt to Ebitda ratio of over 3.5 times is clearly stretched. In some cases, debt covenants with banks get triggered when the debt to Ebitda ratio reaches levels of four times.
Since these firms’ balance sheets will get stretched after the spectrum fee payment, they would have little flexibility on the financing front till debt levels are brought down.
The sad part is that these telecom companies have not only got their balance sheets stretched, they have also overpaid for 3G spectrum.
It’s understandable that the bidding process was competitive because incumbents such as Bharti, Vodafone Essar Ltd and Idea were expected to see this as a defensive move to protect their high-end customer base. If they won’t offer high-end services such as 3G, their customers would simply move to another platform, especially when mobile number portability (MNP) is implemented. But even keeping this defensive strategy in mind, the final spectrum fee is expensive. According to a Citigroup Inc. report, “3G spectrum has gone for an unjustifiable amount. The nationwide bid of Rs16,700 crore can, in our view, neither be justified by revenue protection benefits (post-MNP) nor by capex optimization, and definitely not as a stand-alone business case.”
In order to lessen the burden of the fee outgo, all players bid selectively for circles. As Citigroup’s analysts put it, the fragmented 3G footprint could be a concern in the medium term, especially after the MNP roll-out. Bharti, for instance, bid for 13 of the total 22 circles it operates in. It didn’t win bids in important circles such as Punjab and Kolkata. In these circles, it can end up losing its high-end client base after MNP is implemented.
There will be an impact on earnings as well. According to Citigroup’s estimates, interest and depreciation charges related to the 3G outgo are likely to shave off 13%, 25% and 86% of Bharti, RCom and Idea’s earnings per share, respectively.
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