Reliance Jio has threatened India telecom operators’ major revenue contributor, voice, with the launch of life-time free voice calls, and its launch strategy will squeeze operational cash flows of the Indian telecom sector in Fiscal year 17-18, according to India Ratings and Research (Ind-Ra).
Top telcos such as Bharti Airtel, Vodafone and Idea Cellular’s debt burden will also go up with the increase in spectrum and non-spectrum debt capital expenditure (Capex), and the upfront spectrum payouts in the fiscal year 2017, along with ramped up network capex will keep their free cash flows (FCF) negative, the agency said.
According to Ind-Ra, the immediate concern for the auction spectrum winners will be to put in place an optimal funding mix to meet the upfront payment of Rs 320 billion and subsequent staggered payments.
It said that incumbent operators have the existing balance sheet strength to raise funds from the domestic or global markets. “However, identifying the right long term funding mix to optimise the cost of funds and the monetisation of non-core assets to reduce the debt burden will be crucial for the credit profile,” the agency added, noting that funding for the new spectrum will be a combination of equity and debt for all players.
Vodafone has already raised equity of Rs 477 billion, which will be used for the upfront spectrum payment and also support additional capex. Idea Cellular has incremental capex plan of Rs 10 billion post the spectrum acquisition, and its upfront payout for the spectrum will be part-debt funded given its moderate cash balances.
Bharti Airtel had Rs 20.5 billion of cash and equivalents at end of first quarter, hence part debt funding could be used for the upfront spectrum payment.
The agency said that spectrum bidding by Indian telcos was rational and it is maintaining its outlook on the sector as “Stable to Negative”. “Telecom companies exercised a balanced approach in the recent spectrum auctions, however the purchase of spectrum and non-spectrum linked capex will keep free cash flows (FCF) of the telecom operators negative,” Ind-Ra said.
There were no takers for the pricey 700MHz band and 900MHz, while active participation was seen in the 1,800 Mhz and 2,300MHz bands, and the most active participants were Vodafone India and Idea Cellular.
“Each operator’s spectrum acquisition strategy was to ensure data capacity build up, which was indicated by the bigger block spectrum acquisition in the higher bands of 2300MHz/2500MHz,” the agency said.