NEW DELHI: Bharti Airtel, Idea Cellular and the local unit of Vodafone Group are staring at a sharp fall in cash flows and profits as the fear of losing customers and potential competition from Reliance Jio Infocoom would prevent them from raising call rates enough to offset the cost of buying new bandwidth, say analysts.
Bharti, the country’s No. 1 operator, and nearest competitor Vodafone India are locked in a fierce battle with Reliance Jio Infocomm over airwaves that the government is auctioning, driving up bid prices. The tussle is mainly in the markets of Delhi, Mumbai and Kolkata, where the licences of early players are set to expire this year. At the end of the ninth day of auction on Wednesday, the government was assured of over Rs 61,000 crore from the sale, with the price of 900 MHz airwaves nearly double the starting price, and 1800 MHz going up nearly 30%.
Bharti and Vodafone must buy back spectrum in eight and 10 circles, respectively, through March 2016 in places where they have mostly the more efficient but expensive 900 MHz as their permits are lapsing. No. 3 operator Idea will have to renew bandwidth in nine places over the next two years, though none of its licences would expire this year.
“Free cash flow (at these companies) will likely be constrained in the medium term due to payments for spectrum,” Deutsche Bank said in a note to clients.
Bharti’s cash outflow towards licence renewals is estimated at Rs 18,200 crore, or about 72% of the free cash flow likely to be generated through the fiscal year ending March 31, 2016, it said.
The company’s cash flow would turn negative by fiscal 2016, a fate which would befall on Aditya Birla group company Idea as well given that the free cash flow of Rs 10,000 crore it expects to generate over the next two years would cover less than half of the spectrum renewal costs of Rs 21,900 crore, the house said. Vodafone’s outgo would be Rs 26,000 crore, it said.
Bharti’s profit growth is expected to be 22% in 2015-2016, a sharp drop from an expected 56% expansion in 2013-2014. Idea’s earnings growth could decline to less than a percent from an expected 89% this fiscal year, Deutsche Bank said. Bharti and Idea declined to comment.
Analysts expect auction prices in Delhi and Mumbai for the 900 MHz bandwidth to go well beyond Rs 6,000 crore each, nearly double of what operators paid for bandwidth to offer third-generation services in 2010. The 900 MHz band is much more cost efficient and can be used to deploy any future technology. At the end of day nine, Delhi was going at around Rs 3,705 crore while Mumbai was at around Rs 2,815 crore.
“The current bid price of 900 MHz is way behind its true value as it has reached only at the level of 3G price discovered in 2010, and this spectrum if far more valuable and time-critical,” said a senior executive of an auction participant.
Taking into account that most of the payment will be staggered, operators need to pay 33% of their 1800 MHz and 25% of their 900 MHz winning bid amounts upfront, which would mostly deplete their cash flows unless they take a loan.
The overall cost will also need to be amortised over the 20-year duration of the licence, thus weighing on net profit.
Any debt taken will push up interest charges, further dragging profits, say analysts.
Three analysts who spoke to ET said the top operators would need to raise call rates by 10-15 paise a minute to offset the effects of the auction, but are unlikely to do that for fear of losing customers to their smaller rivals with no compulsion to increase rates. Competition is also likely to pick up with the launch of service by cash-rich Reliance Jio Infocomm, expected later this year.
According to the analysts, if any of the existing operators fail to retain their 900 MHz airwaves, that would mean additional capital expenditure for them related to switching to an alternative network, which will hurt operating margins.
A senior executive of one of the top bidders said operators would need to “squeeze” as much costs as they can in cell-site management operating expenses, made up mainly of site rentals, diesel and power costs. “Even a 1-2% cut can give a bit of a cushion to the operators,” he added.
Deutsche Bank cut its price target on both Bharti and Idea shares, while keeping its “hold” and “sell” ratings, respectively, on them. The house cut Bharti’s target price by 5% to 325 and Idea’s by 19% to 110. Bharti’s stock closed 0.9% up at 308.15 on the BSE on Wednesday while Idea rose 2.4% to 132.95, both outperforming the Sensex index that rose 0.4%.
(Source: The Economic Times, February 13, 2014)