Spectrum race makes Indian telcos highly leveraged, say analysts

With the recently concluded auctions getting bids worth Rs 65,800 crore, Indian telecom operators are now among the highest leveraged in the region, according to analysts.

“Such high payouts towards spectrum is a unique Indian phenomenon that damages returns immediately. Any potential upside from this will be limited by the entry of large scale operator Jio. We continue to stay cautious on the Indian telco sector,” said analysts at Credit Suisse.

Bharti Airtel and Idea have, for example, purchased spectrum worth Rs 14,240 crore and Rs 12,800 crore. “Post the auctions, the leverage levels for the companies rise to 2.9/4 net-debt/EBITDA, respectively – making these among the most leveraged telcos in the region. Recall that prior to the auctions both operators had assured that their bidding would only be selective: it appears to us that competitive compulsions have forced more aggressive bidding,” Credit Suisse added.

Morgan Stanley said that over the last two auctions, the industry spent $27billion and $10 billion, respectively, more than industry revenues. “With rising competitive intensity, we believe the operators would not have the pricing power and tariffs would continue to be under pressure. Rise in capex and rising leverage puts balance sheets and earnings at risk,” Morgan Stanley said.

Kotak Institutional Equities observed that cumulative bids in auctions since 2010 now total Rs 3.5 lakh crore. “For an industry with annual revenues in the vicinity of Rs 1.8 lakh crore and EBITDA around Rs 50,000 crore, these are not small numbers, in our view,” it said.

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