Telecom Sector to Face Consolidation, Rise in Debt

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Telecom industry will witness consolidation and
Idea-Videocon spectrum trade is first of a series
of such deals possible in the sector driven by
the recent guidelines on spectrum trading, India
Ratings and Research (Ind-Ra) said today. The
rating agency added that trading deals will lead
to the rise in debt levels of the acquiring
entities. Idea Cellular has announced purchase of
the 4G airwaves in the Uttar Pradesh (West) and
Gujarat circle from Videocon Telecommunications
for Rs 3,310 crore last week, a deal which
indicates that Videocon may be looking at exiting
the telecom business.
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The availability of spectrum to launch 4G
services in a fast growing 4G ecosystem will
enable Idea to participate in the anticipated
spurt in demand for data. Similarly, other
telecom operators would need to strengthen their
spectrum capabilities in order to meet the growth
in 4G services and competition from Reliance Jio
Limited (R-Jio). Therefore, it is possible that
Bharti Airtel and Vodafone India may show
interest in purchasing spectrum in the circles
remaining with Videocon, Ind-Ra said. It added
in Bihar and UP (East), Airtel may be a potential
buyer of Videocons spectrum as Airtels current
spectrum is in a block of less than 5 MHz and in
Haryana, Vodafone may look to buy spectrum for
the same reasons
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Videocon has 5 MHz block of spectrum in the 1800
MHz band in four other circles of Bihar, Haryana,
Madhya Pradesh and UP (East) post the Idea
deal. The Idea deal will also set a benchmark for
pricing the spectrum, as other operators may also
look for opportunities to cash out their spectrum
holding and retire debt. Ind-Ra notes that Ideas
purchase of the spectrum is at a significant
premium to the last auction discovered price of
similar spectrum. The Rs 3,310 crore price paid
by Idea is 98 percent higher than the spectrum
prices discovered in March 2015 auction. Idea has
gross debt of Rs 23,540 crore as of September
2015. The current deal can potentially increase
the total debt of the company by over 10
percent, it added.
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In case the other telecom players also tend to
acquire spectrum at a substantial premium, the
debt levels in such companies could increase
further, it added. It further said heightened
competitive intensity will also restrict any
meaningful pricing improvement for the telecom
sector in the near to medium term. At the same
time, cash accruals from such investments will be
back ended as 4G revenue will gain significance
over the next three to five years and therefore
could be credit negative in the short term, it
added.
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Ind-Ra said the telecom sector, which is
witnessing increasing competition in the data
space is likely to take on additional capex to
sustain growth.The ratings agency said
acquisition of spectrum is strategic for Idea,
enhancing its 4G capability on the 1800MHz
band. With the acquisition of this spectrum,
Idea will increase its 4G footprint from 10 to 12
circles, which currently contribute around 80
percent of the total revenues, it said.
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Gujarat and UP (West) are important markets for
Idea as they together account for more than 11
percent of its total Indian subscriber base and
contributes 15.5 percent of the companys
revenues. Also, for the quarter ended September
30, 2015, Ideas revenue market share in Gujarat
and UP (West) was 25.2 percent and 35.1 percent
respectively, while the subscriber share was at
13.5 percent and 14 percent respectively, it
added. Ind-Ra said Idea faces a credible threat
in these circles from Reliance Communications
which had acquired spectrum in the 800 MHz band
in both these circles in the March 2015 auctions.
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The 800MHz band provides RCom a chance of
becoming 4G capable on a superior band and thus
potentially providing a better 4G experience than
the incumbents thereby challenging their existing
market position, Ind-Ra said.For More
Informationhttp//www.videocontelecom.com/