Relief package for telecom firms may not be enough

The government's decision to relax period for payment of spectrum dues and spectrum caps for telecom service providers may just offer a short-term relief to the industry reeling under financial stress.

According to analysts, the measures are far from enough. Though they will pace up merger and acquisitions in the telecom sector, an intense competition for a few more quarters will continue.

An improved cash flow scenario for telecom players, though, would mean a fall in the government's budgeted revenue estimates from the sector.

"It (the measures) should help ease some pressure on short-term liquidity of telecom service providers, with about $200 million higher cash flows for Bharti/Idea in FY19 per our estimate," Goldman Sachs said in an analyst report on Thursday.

The increase in time period does not change the present value of debt to be repaid. It should help improve liquidity in the near term, especially for Idea Cellular, and the savings could potentially help the company to invest more in capex, the report said. This will be particularly beneficial for Idea, but does not impact Bharti Airtel and Reliance Jio much as both companies have fairly strong balance sheets.

The Cabinet on Wednesday had approved an increase in overall spectrum cap limits to 35% from the earlier 25% and also an extended tenure for repayment of spectrum bought in auctions to 16 years from 10 years.

However, there is a catch here. For operators, the option of repayment of spectrum dues is just an option given to them, and since there has been no change in interest rates, the net outgo over the total period may increase, prompting telcos to not opt for this, a Mumbai-based analyst said on the condition of anonymity.

Deutsche Bank in a report said Idea/Vodafone merged company's (a merger between the two is underway) annual installment stands at around Rs 16,000 crore compared to a current annualised EBITDA of Rs 10,000 crore. 
"The longer tenor will reduce the annual instalment by 30%, which will significantly aid the mid-term cash flows for the merged company."

For Bharti, the installment and annualised EBITDA for India operations stand at around Rs 9,000 crore and Rs 23,000 crore, respectively, while Reliance Jio's annual instalment stands at around Rs 4,500 crore.

Morgan Stanley estimates Airtel's annual spectrum payments would reduce by Rs 1,400-1,700 crore, about 20% over FY19.

"We see about 15% downside risk to government's budgeted revenue estimates from the sector," Morgan Stanley said.

Deutsche Bank said Vodafone-Idea combined entity was exceeding the cap in key markets including Maharashtra, Gujarat, Kerala, Haryana and Uttar Pradesh (E) which accounts for 32% of the total Indian mobile market. The combined entity has a leadership position in them and the ability to retain all its spectrum aids its competitive position.

As per data from Goldman Sachs report, the combined entity of Vodafone- Idea had 45.4 MHz of excess spectrum across all service areas put together which they would have had to surrender according to earlier rules. 
This spectrum is in the bands of 900 MHz and 2500 MHz, and is estimated to be around $800 million at current market prices. With the revision in spectrum caps, now they can retain it.

Even Reliance Jio will be able to access 800 MHz spectrum of Reliance Communications now without breaching the cap.

The relief by the government came after IMG recommendations which were made to ease out some financial stress faced by the operators due to intense competition started by the entry of new player Reliance Jio.

CASH ON CARDS

• Goldman Sachs said the measures would lead to about $200 million higher cash flows for Bharti/Idea in FY19
   
• Morgan Stanley estimates Airtel's annual spectrum payments would reduce by Rs 1,400-1,700 crore, about 20% over FY19