Spectrum payouts and network capex will keep telcos FCF negative, India Ratings says

COIMBATORE: Though telecom companies exercised a balanced approach in the recent spectrum auctions, the purchase of spectrum and non-spectrum linked capex (capital expenditure) will keep free cash flows (FCF) negative, India Ratings and Research has said.
Since there were no major surprises in the spectrum auction and as expected spectrum bidding was rational, India Ratings has maintained its outlook on the sector as ‘stable to negative’.
“There were no takers for the pricey 700MHz band and 900MHz, while active participation was seen in the 1800Mhz and 2300MHz bands, and the most active participants were Vodafone and Idea Cellular,” it said.
“Each operator’s spectrum acquisition strategy was to ensure data capacity build up, which was indicated by the bigger block spectrum acquisition in the higher bands of 2300MHz/2500MHz,” the agency stated. As against the Rs 6.5 lakh crore valuation at reserve price, only Rs 65,789 crore was realised.
“The winning prices were moderately higher (up to around 15%) than the reserve prices. The most steeply priced 700MHz representing 72% of the total reserve price remained unsold,” it said. India Ratings believes that the rationalisation in prices of 700MHz is a pre-requisite for successful auction in future, given the strong divergence of views between operators and the regulator.
“The immediate concern for the auction winners will be to put in place an optimal funding mix to meet the upfront and subsequent staggered payments,” India Ratings, which is part of the Fitch Group, said.
“Incumbent operators have the existing balance sheet strength to raise funds from the domestic or global markets,” it said.
However, identifying the right long-term funding mix to optimise the cost of funds and the monetisation of non-core assets to reduce the debt burden will be crucial for the credit profile, the agency said. “Funding for the new spectrum will be a combination of equity and debt for all players,” it said.
India Ratings expects debt burden to rise for the top telecom companies, with the increase in spectrum and non-spectrum debt capex. In addition to the upfront spectrum payouts in 2016-17, network capex needs to be ramped up, which will keep FCF negative, India Ratings said.