While the current financial crisis has not had any overt impact on the Indian telecom sector yet, the overall fund-raising scenario and the various policies adopted by the government to ease the crisis are likely to affect it. Telecom analysts take stock of the situation and discuss the likely impact on the upcoming 3G auction and the plans of existing as well as new telecom players…
How vulnerable is the Indian telecom sector to the global financial crisis?
Pankaj Agrawal: On a sector-wise basis, the crisis would not really affect the incumbent carriers. On the original equipment manufacturing (OEM) front, there is a possibility that there may be Chinese or other Asian vendors, who can start getting into the Indian market as they are financed by state institutions. For instance, in a recent deal, Reliance Communications (RCOM) secured a $750 million loan from the China Development Bank for the equipment RCOM bought from Huawei for its GSM network expansion. Given that there is a liquidity crunch in the US and Europe, this might have Asian vendors using their current liquidity position for getting a larger market share.
In the value-added services sector, there may be some compression because most of the private equity (PE) players are not really willing to invest money in upcoming companies. So they may be looking at early exit options and in the case of upcoming initial public offerings (IPOs), these players are looking at options to convert their loans into equity. The valuations will get very tight and PE players will demand higher internal rates of return to get into this sector. This implies that given the PEs prevailing earlier and the PEs today, the latter are looking for at least double the share for the same price.
Arpita Pal Agrawal: The vulnerability of any sector to the global financial crisis depends on its exposure, integration and dependence on the global economy. In the case of the Indian telecom sector, the vulnerability is primarily to the extent of the money the sector requires to fund its expansion from external sources and also the funding required for the upcoming 3G and Wi-Max spectrum auctions. The other aspect to this question of vulnerability is the depreciating rupee in the case of operators buying dollar-denominated equipment. Demand-side slowdown due to this crisis is not really expected.
Amit K. Ahire: The global financial crisis is not expected to have any significant impact on the growth plans announced by Indian telecom operators. Some telecom operators such as Bharti Airtel, Idea Cellular and RCOM have already made provisions for future expansions by way of stake sale in subsidiaries or debt funding. State-owned entities such as Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are cash rich and are able to fund any kind of capital expenditure. The hike in interest rates would result in an increase in interest costs, impacting margins to that extent.
Abhishek Kapur: There are three key ongoing trends in the telecom sector ?? first, 3G rollouts and 3G licences which people are going to bid for; second, rural expansion; third, improving the quality of voice calls, which currently seems to be dipping.From all three perspectives, what we need is a major influx of capital, which has become very expensive in terms of high interest rates. So, the sector will be impacted on all three fronts.
Speaking of expansion plans, with the rupee having a free fall at the moment, imports are going to get costlier. When the rupee was appreciating, it was actually helping telecom operators because they require high investments in equipment, most of which is imported. Now that the rupee is depreciating, the cost of imports is getting higher. People need to revaluate their budgets and expansion plans. That, in some cases, might lead to curtailment of expansion, thus hitting the 500 millionsubscriber target, if it is to be primarily achieved from new areas.
Will the crisis impact the government’s revenue target from 3G spectrum auctions?
Pankaj Agrawal: As far as 3G revenue targets are concerned, there is not likely to be any impact.But people who are planning to get into this arena have to arrange for funds, which come at very high interest rates. This implies a longer business case for 3G. So, instead of a five-year business case for 3G, we might be looking at an eight-year one.
Arpita Pal Agrawal: The government is looking at participation from both Indian and foreign telcos to achieve its revenue targets from the upcoming auctions. The current financial crunch, which affects the fund-raising ability of telecom operators, will impact bullishness in bidding at the auctions, and is expected to have a negative impact on the achievement of 3G/broadband wireless access auction targets.
Amit K. Ahire: The government’s revenue target from 3G spectrum auctions would depend on the policies adopted by the Department of Telecommunications. The current 3G policies are somewhat ambiguous in nature, which may prevent the entry of foreign players. If that happens, it would severely impact revenue generation from 3G auctions. Otherwise, we don’t see the crisis having any significant impact on the auction itself.
Abhishek Kapur: What people plan to invest in a particular sector is based a lot on their confidence on the financial institutions, PE funds, banking institutions and other interested players. With overall confidence dipping, people will be wary of making large investments. So, what one can probably expect in the 3G bidding ?? which may have otherwise gone the European way where operators really outbid each other to acquire 3G licences ?? is operators revaluating the pricing and their bids for these licences. What the government can expect is that because of the low financial confidence across the world, the 3G bidding may not meet very high levels.
How will the scenario change for new entrants like Datacom, Unitech and Swan after the market crash?
Pankaj Agrawal: As far as the new entrants are concerned, most of them are diluting some part of their stake to foreign strategic players. For instance, Swan sold a 45 per cent stake to Etisalat for $2 billion. Funds received through such stake sales will be used to roll out their networks. As far as foreign players interested in the sector are concerned, I do not think their number will decline since there is still a 300 million subscriber market to be tapped here.
Arpita Pal Agrawal: For new players, the impact of the market crash is multi-fold. It impacts their ability to divest equity stake at desired valuations and to raise debt and the consequent increase in their cost of debt. All of this can delay the planned rollout of their networks. Some of the new entrants are from the real estate sector. Real estate has seen some decrease in value, which further increases the severity of the impact.
Amit K. Ahire: There is still significant investor interest in the Indian telecom space. This is clearly reflected by the Swan-Etisalat deal.However, it will be difficult for new entrants to fund the capex on their own as their market cap has taken a significant beating and interest rates have gone up.We believe that all new operators would try to offload stake to foreign players before launching services.
Abhishek Kapur: Most new players are planning strategic partnerships. If they are planning to tie up with strong existing operators or foreign players, then, because the Indian telecom market by itself remains very bullish, there might not be any difficulty in doing so. If they are planning to raise funds for their expansion directly through IPOs or through strategic partnerships with PE firms etc., that may be affected because of the global financial crisis. The sensex is already at a two-year low.
To what extent is the crisis likely to impact the valuations of existing and new players?
Pankaj Agrawal: In the short term, it will affect the financial markets a bit. But I do not think that there will be a long-term impact on the fundamentals, at least for the existing players.Taking Bharti Airtel’s example, it will be done with its network expansion by 2010 and I am sure it must have arranged its line of funding for that expansion by now. It is the same with RCOM. Once the funding is tied up and network expansion is complete, such things cannot impact valuations. As far as the new players are concerned, they will have to borrow at very high rates, which will in turn, impact their earnings before interest, taxes, depreciation and amortisation. The IPO market will definitely become tougher.
Arpita Pal Agrawal: The valuations and IPO plans of players will be negatively impacted. Valuations are already down by more than 30 per cent compared to last year. Players who are already established with a growing revenue stream will be less impacted than the new ones because the new players are also looking at funding, the cost of which will go up.Also, their plans to hive off some of their businesses like towers will get delayed till the time the market improves.
Amit K. Ahire: The impact of the market meltdown has already been reflected in the current prices of telecom companies. However, the growth of companies would be a function of the availability of spectrum and the companies’ ability to attract new subscribers. The fundamentals of the sector are likely to be unaffected by the crisis.
Abhishek Kapur: Today, the market is driven primarily by sentiment and it will take time to recover.So, people might want to use these scrips at the moment to trade, rather than hold on to them for a long time. Once the market starts refocusing on fundamentals, it might be a good time to buy the securities since their prices will be low.
