Spectrum auction: Fitch says telcos' finances will be under pressure

Finances of telecom operators will come under pressure and their ability to invest in building networks will be restricted after paying for spectrum won in the recent auction, Fitch Ratings said in a report.

"India's biggest telecom spectrum auction to date, which concluded on 25 March and raised $17.7 billion, will exert pressure on telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term," it said in a report.

The spectrum auction which concluded on March 25 attracted bids worth Rs 1,09,874.91 crore.

Idea Cellular made the highest bids totaling Rs 30,306.98 crore, followed by Bharti Airtel Rs 29,130.2 crore, Vodafone 25,959.74 crore, Reliance Jio Infocomm Rs 10,077.53 crore, Tata Teleservices Rs 7,851.33 crore, Reliance Communications 4,299.13 crore and Aircel Rs 2,250 crore.

"The winning prices for 800MHz, 900MHz and 1800MHz were 80 per cent, 130 per cent and 25 per cent higher, respectively, than the reserve prices," Fitch said.

The companies  have the option to make a part of it as an upfront payment which jointly amounts to Rs 28,872.77 crore.

"We believe that telcos are likely to raise headline voice tariffs in response to high spectrum prices. Bharti would add at least $550-600 million of additional annual EBITDA if average revenue per user increases by 10 per cent. However, the extent of tariff increases is likely to be affected by the impending entry of Reliance Jio," Fitch said.

Meanwhile, another rating agency Moody's retained Baa3 (investment grade) credit rating for Airtel and Ba3 (speculative grade) for RCom saying that both companies will able to make payment.

"Bharti can make upfront payment from its cash and is not required to go for external debt. It is selling some of its mobile towers which is going to add to its cash. RCom can meet its upfront payment too but they have strained liquidity position," Moody's Assistant Vice President, Analyst, for Corporate Finance Group, Nidhi Dhruv told PTI.

Fitch said 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.

Fitch said, "We believe that Bharti's and RCom's 'BBB-' and 'BB-' credit profiles will remain intact, albeit with a reduced ratings headroom."

It added that Airtel, Vodafone, Idea and Rcom accounted for 82 per cent of winning bids.

"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," Fitch said.

The telcos will report negative free cash flow in 2015 as they need to pay a quarter of the committed amount upfront.

The balance will be paid in installments over 10 years from 2017, Fitch said. .