March 27, 2015 / 9:32 AM / 5 years ago

Fitch: India Spectrum Auction to Weigh on Telcos' Credit Profile

(The following statement was released by the rating agency) SINGAPORE, March 27 (Fitch) India's biggest telecom spectrum auction to date, which concluded on 25 March and raised USD17.7bn, will exert pressure on telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term, says Fitch Ratings. However, we believe that the auction will spur consolidation, which should strengthen the telcos' pricing power. In the medium term, we think that the market will support six competitors - from a current 10 - as smaller and weaker telcos will seek M&A or exit the industry, given the high spectrum prices and stretched balance sheets. The top-four telcos - Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications (Rcom) - accounted for 82% of winning bids, and committed USD4.7bn, USD4.2bn, USD4.9bn and USD693m, respectively. We believe the top three paid a premium to retain their 900MHz spectrum due to limited spectrum on offer and the necessity to retain expiring spectrum to avoid network disruption. They also added spectrum in 1,800MHz and 2,100MHz to strengthen their data services. Bharti now has the best spectrum assets with its ownership of about 40% of the private telcos' 900MHz. We believe that Bharti's and Rcom's 'BBB-' and 'BB-' credit profiles will remain intact, albeit with a reduced ratings headroom. Rcom did not gain spectrum in three circles (or zones) where its 900MHz spectrum was expiring; these zones contributed only about 5% of its revenue. Rcom, which has a pan-India 800MHz footprint, plans to use its spectrum in 2100MHz and 800MHz to transition its subscribers in such circles. We believe that Rcom will improve its FFO-adjusted net leverage to below 4.5x by 2015-2016. Idea will be the worst affected by the auction as it could limit its ability to generate free cash flow and capex investments. We believe that telcos are likely to raise headline voice tariffs in response to high spectrum prices. Bharti would add at least USD550m-600m of additional annual EBITDA if average revenue per user increases by 10%. However, the extent of tariff increases is likely to be affected by the impending entry of Reliance Jio - part of Reliance Industries (BBB-/Stable). Reliance Jio, equipped with 1,800MHz and 2,300MHz spectrum, is likely to introduce 4G data services in 2015. The cash-rich firm restricted itself to 800MHz in the auction, and filled the gap in zones where it does not currently own 1800MHz. Vodafone Group PLC's 'BBB+' rating headroom will come down as it pays spectrum payments in India, and participates in planned auctions in Germany and Turkey later this year. These auctions come at a time when Vodafone is in the middle of Project Spring, its ongoing GBP19bn network investment programme to build a network quality advantage over its competitors. Increased market share and - ultimately - improved cash flow generation from this investment is required if Vodafone is to reduce leverage from a potential peak in FY16. Eight operators committed USD17.7bn to win a total of 465MHz of spectrum across four bands - 800MHz, 900MHz, 1,800MHz and 2,100MHz - with each band valid for 20 years. Bidding was most intense during the 19-day auction for the 900MHz and 800MHz band, which can be used for both 2G and 3G as signals can travel further and provide better indoor coverage than higher frequencies. The winning prices for 800MHz, 900MHz and 1800MHz were 80%, 130% and 25% higher, respectively, than the reserve prices. Most telcos will report negative free cash flow in 2015 as they need to pay a quarter of the committed amount up front. The balance will be paid in installments over 10 years from 2017. Contacts: Nitin Soni Director Corporates +65 6796 7235 Fitch Ratings Singapore Pte Ltd. #35-05, Suntec Tower 4 6 Temasek Boulevard Singapore, 038986 Steve Durose Managing Director Corporates +61 2 82560307 Damien Chew Senior Director +44 20 3530 1424 Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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