3G bid winners will find balance sheets under pressure: Fitch
22 May 2010
With the 3G auction now complete, analysts generally believe that the results will have a negative impact on the creditmetrics of most private telecom operators in the short to medium term.
In a special report to be published shortly, Fitch Ratings has estimated that the high up-front licence and spectrum fees would significantly raise net debt levels for most of the telecom companies, and financial leverage can accordingly be expected to deteriorate, assuming Indian telecom companies fund their purchases at the auction through debt.
Fitch estimates that the net debt/operating EBITDA ratio of most of the companies will rise between 1.0x to 2.5x. This is likely to go up further after India begins a separate broadband wireless access (BWA) auction, scheduled to start in May 2010. Most of India's telecom operators have high debt levels, with the exception of public sector telcos Mahanagar Telephone Nigam Limited (MTNL), Bharat Sanchar Nigam Limited (BSNL), and Bharti Airtel Ltd.
Moreover, all the companies are facing wireless margin pressures due to intense price competition in the over-crowded industry. The Indian wireless market is highly competitive, with 10 operators (including MTNL and BSNL as one) competing in each of the 22 telecom circles as of March 2010, and two more operators having recently launched operations. In addition, a fragmented win of 3G licenses across the 22 circles suggests that the competitive intensity is unlikely to abate in the near term.
The fragmented picture of the 3G spectrum space is the key pressure point for the sector, as against expectations that it will consolidate things. An HSBC research paper points out that the pressure on voice rates is likely to continue.
Given that 3G use still has a limited following in proportion to total telecom subscribers, there will be a thrust on getting more customers on board. This will put more pressure on data pricing, Macquarie's telecom analyst Shubham Majumder told Business Standard.