High 3G prices: winners will see big jump in net debt

Most analysts agree that private telecom players have overpaid for 3G spectrum in the recently concluded auction, stretching their balance sheets too thin. But what impact will it have on their bottom lines is now one of the most debated issues in financial circles.

The successful bidders, including Bharti Airtel, Reliance Communications, Vodafone Essar and Tata Teleservices, have together agreed to pay as much as Rs67,718 crore to the government for buying the spectrum required to offer 3G services. Vodafone will cough up nearly Rs11,500 crore for air waves in nine circles, while Reliance Communication has won spectrum in 13 circles for Rs8,585 crore.

The worry is whether these operators, in their eagerness to get more spectrum, have overbid, and as a result consumers may have to pay out a higher fee for availing of 3G technology. The concerns are not unfounded because similar auctions conducted earlier in Europe ended with operators quoting astronomical amounts, resulting in high tariffs.

The net debt of each of the three large listed companies in the space, Bharti Airtel Ltd, Idea Cellular Ltd and Reliance Communications Ltd, will soar as a result of the high bids.

Bharti Airtel is currently in a net cash position, based on its results for the March quarter, but after the outgo of Rs12,296 crore, its net debt will rise considerably. Bharti's net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio will rise to 0.7 times, based on its profit for the year ended March. After accounting for the debt required for the acquisition of the African assets of Kuwaiti telecom firm Zain, the company's net debt to EBITDA ratio will be as high as 2.6 times.

Idea Cellular and Reliance Communications are much worse off. Their net debt to EBITDA ratio stood at 1.7 times and 2.5 times respectively, before accounting for the 3G spectrum fee. After accounting for the fee, the ratio rises to 3.6 times for both companies. According to an analyst with a foreign brokerage, a debt to EBIITDA ratio of over 3.5 times is clearly stretched. In some cases, debt covenants with banks get triggered when the ratio reaches levels of four times.