Telecom Auction Winners Face Dilemma in Finding Optimal Funding Mix: India Ratings

The incumbent operators like Bharti Airtel, Idea Cellular and Vodafone India has bid aggressively in the recently concluded telecom spectrum auction this month. India Ratings in a recent report has said that this may impact the balance sheet of these entities as it will increase the leverage. The hike in leverage is is likely to be countered to an extent by the expected increase in data volumes and the likely sector consolidation over the short to medium term.

But the agency has raised its concern on the winners if they fail to identify an optimal funding mix to meet the upfront and subsequent amounts. This is likely to put pressure on the banking sector too, where the exposure to the telecom sector may increase. However, among the three incumbent operators along with Reliance Jio have existing balance sheet strength to raise these amounts from the domestic or global markets. But it has to be watched that how they identify the right funding mix to optimise the cost of funds and long-term cash flows. This could have a bearing on their credits profile and long-term shareholder value.

Big 4 Winners: Of the total auction receivables of Rs 61162 crore due to the government of India, around 98% will come from Vodafone India, Bharti Airtel, Reliance Jio and Idea Cellular. The big three existing players account for around 81% of the auction receivables. While all the players concerned have a strong credit profile on a standalone basis, most of them also have the benefit of strong parents as majority or key shareholders.

The other existing players namely Uninor, Aircel and Reliance Communications account for the remaining 2% of the auction receivables.

The companies on an immediate basis have to pay Rs 18300 crore of the auction amount, which is 25% for 900Mhz and 33% for 1,800Mhz. The successful auction participants have the option to pay the residual amount as 10 annual installments post a moratorium of two years. However, an interest of 10% p.a will be charged. A majority of the four large winners have a cost of debt below 10%. This may prompt some of them to raise debt so as to pay the entire amount due at one go which may be beneficial from the long term cash flow generation perspective.

Two of the four players have detailed financial statements available in public domain. If these players decide to pay the entire auction amount upfront, their debt level may increase in the range of 25%-70%. However, equity funding from existing sponsors may also be an option which could reduce the extent of debt.

On the contrary, if the players decide to pay only the upfront fees by way of debt, the immediate balance sheet debt would only increase by 8%-25%. This option may provide more elbowroom to these corporates. The residual dues to the government would remain an economic liability which still needs to be honoured.

The three large existing players have positive cash flow from operations. Thus, the amounts that will be due to the government post a moratorium of two years need not necessarily be funded by debt. The overall debt reduction may not also happen at the same pace unless benefits of data volumes and pricing power overweigh incremental cash outflow.

Players such as Bharti Airtel may be less motivated for aggressive bidding in the next rounds for 900Mhz (in non-metro), given the sufficient acquisition of 1,800Mhz in the current rounds.

The agency is of the view that at least some players, particularly the ones with strong parent or group support, to pay an amount higher than the upfront fees, with the objective of improving net cash flow.