The recently concluded 3G spectrum auctions have mixed implications for the government and the industry. While the government stands to hugely benefit, with Rs 677.1 billion being added to its coffers as 3G spectrum fee and the ongoing broadband wireless access (BWA) auctions expected to bring in another Rs 150 billion; for telecom operators, the outgo is likely to make a big dent in their balance sheets.
Of course, the country’s 600 million mobile phone users will be the real winners. The 3G and BWA spectrum will not only enable faster and more robust internet services but will also provide access to enhanced data services such as e-commerce, social networking and telemedicine. Industry analysts say that the next big war will take place on the 3G turf, with operators wooing customers through low tariffs and innovative offerings.
3G presents immense opportunities for various other industry segments. For instance, mobile device manufacturers, who are ready with a slew of 3G handsets; hosting, billing and network management service providers; and content providers who offer games, wallpapers, graphics, etc.
Operator perspective
The 3G auctions have cost the operators dearly. The value of a pan-Indian licence amounted to Rs 168.28 billion, almost five times the reserve price of Rs 35 billion. However, none of the operators were inclined to individually shell out funds for all-India spectrum; the highest number of circles won by an operator was 13. Seven service providers won bids for 3G spectrum. These were Bharti Airtel (Rs 122.95 billion for 13 circles), Reliance Communications (RCOM) (Rs 85.85 billion for 13 circles), Aircel (Rs 64.99 billion for 13 circles), Idea Cellular (Rs 57.69 billion for 11 circles), Tata Teleservices Limited (TTSL) (Rs 58.64 billion for nine circles), Vodafone Essar (Rs 116.17 billion for nine circles) and S Tel (Rs 3.38 billion for three circles).
The operators are relying heavily on debt funding. Most of them have used a combination of bank loans and commercial papers, besides cash reserves and internal accruals. The unexpectedly high bids forced them to raise massive debt, for which they will pay the price over a long period, according to analysts.
Fund composition
Of the total bid amount, operators have paid about Rs 450 billion through loans, while about Rs 225 billion has been paid from cash reserves and internal accruals.
One-fourth of the Rs 450 billion loan has been raised through the issue of commercial papers at an interest rate of 9.25 per cent for one year. These are shortterm notes with a maturity period of one year or less. The winners have mobilised about Rs 110 billion through this route.
The rest has been raised mostly through unsecured one-year loans from the State Bank of India (SBI), IDBI Bank, Bank of Baroda, Bank of India and Union Bank of India at 9-11 per cent interest.
However, according to senior bankers, in a bid to suitably manage the break-even point, 3G operators are expected to replace short-term rupee loans from banks with long-term, lowcost external commercial borrowings (ECBs) over the next one year. While operators who had completed their 2G rollout broke even in four-five years, 3G service providers could expect to break even in six-seven years due to the higher spectrum and licence costs. In the current scenario, the overall ECB cost to a telecom operator would work out to about 7.25 per cent. This is a cheaper and longer-term alternative compared to the short-term rupee credit from banks.
A look at the companies’ payouts for 3G licences…
Bharti Airtel: The telecom major will shell out Rs 123 billion (the highest) for 3G airwaves in 13 circles. It has raised Rs 85 billion from a consortium of financial institutions including SBI and HDFC Bank, which have agreed to part-finance the payment. The six-year loan carries an interest of 8-9 per cent. Bharti is also likely to use its cash reserves, which stood at Rs 77 billion in March 2010, to pay out the remaining amount for both 3G and BWA spectrum.
Vodafone Essar: The country’s second largest private operator in terms of revenue, Vodafone Essar will pay for 3G spectrum from its Rs 100 billion loan from SBI. The five-year loan carries an interest rate of less than 10 per cent for the first two years, and will thereafter be readjusted on the basis of the average prime lending rate of four public sector banks -? SBI, Punjab National Bank, Canara Bank and Bank of Baroda. Vodafone Essar is securing additional funding by issuing commercial papers and has raised another loan from a consortium of banks.
RCOM: The operator has raised Rs 40 billion by selling commercial papers at an interest of 6 per cent. The Life Insurance Corporation (LIC) has picked up Rs 20 billion of this amount, while the remaining has been subscribed to by mutual funds and banks.
Idea Cellular: The operator will pay over 40 per cent (Rs 24 billion) of the total Rs 57.69 billion through internal accruals.
This amount will be largely paid from the leftover funds from the sale of its stake in Aditya Birla Telecom to private equity player Providence in 2009. Idea Cellular has raised Rs 5 billion by issuing commercial papers, and the remaining amount would be paid through a mix of longand short-term loans from a consortium of banks led by IDBI Bank.
Aircel: The operator, which has to pay Rs 65 billion for 3G airwaves, has raised Rs 40 billion through the issue of commercial papers at 6 per cent interest with a oneyear maturity period from Deutsche Bank, Standard Chartered, HSBC and Barclays. It has also raised a Rs 20 billion one-year bridge loan from HSBC, Punjab National Bank and Axis Bank. The company is planning to utilise funds worth Rs 85 billion that accrued from the sale of its tower business to pay for the spectrum.
TTSL: The operator has raised about Rs 50 billion for 3G spectrum. This includes a 10-year bond issue worth Rs 10 billion to LIC, Rs 10 billion from the issue of commercial papers at 6 per cent interest to various institutions, a five-year Rs 15 billion loan from a consortium of banks led by the Central Bank of India, and a Rs 11 billion loan from public financial institutions such as IDBI and Kotak Yearly.
In addition, TTSL has about Rs 60 billion in cash reserves, which was raised from its stake sale to NTT DOCOMO in 2009.
S Tel: The company has won 3G spectrum in all three of its operating circles and is required to pay Rs 3.38 billion for 3G spectrum. The operator has already secured a loan worth Rs 3.5 billion from IDBI Bank at an interest rate of less than 10 per cent.
BSNL/MTNL: Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are also likely to approach banks to mobilise Rs 101.86 billion and Rs 65.64 billion respectively for procuring 3G licences.
Likely impact
The biggest impact of these auctions on operators has been on the financial front. According to industry experts, while Bharti’s net debt-equity ratio post the 3G spectrum payment will stand at an estimated 1.35 including the debt taken for the Zain acquisition, Idea’s net debt-equity ratio will rise to 1.03 after the payment for 3G spectrum. Likewise, RCOM’s net debt-equity ratio will rise to 0.73 after it pays for 3G spectrum.
Some analysts believe that the operators can cope with the bid burden. According to them, there are two factors that work in favour of Indian players. First, with 500 million mobile users, the market potential is huge. For most consumers, 3G will be the first and the only way to access broadband services through mobile devices. Second, as the bidding pattern shows, the operators have wisely opted for circles in which they already have a strong presence. In 11 of the 13 circles where Bharti has won 3G spectrum, the operator has quoted an amount that is much lower than the revenues it currently earns from those circles. For example, in Andhra Pradesh, Bharti has agreed to pay Rs 13.73 billion for 3G spectrum, which is only 48 per cent of its current annual gross revenue from the circle. On the other hand, the company dropped out of the race in Maharashtra and Gujarat where the bid amount surpassed its annual revenues. Similarly, Vodafone Essar has focused on circles where the bid amount is lower than its annual revenues.
Both these factors will cushion the high spectrum costs to some extent.
According to a CRISIL report, for the first couple of years, 3G services would be margin dilutive because of the increased network operating costs, and sales and marketing expenses, without a commensurate revenue increase. Subsequently, with an increase in the 3G subscriber base and data services usage, 3G services are expected to help operators improve their margins significantly. By 2013-14, CRISIL expects a 3G service provider to enjoy an advantage of 500-700 basis points in earnings before interest, taxes, depreciation and amortisation margins over a non-3G player. However, the net margins of 3G operators will be strained over a period of three-four years because of high capital charges (the interest outgo on account of debt raised for 3G network rollout and the amortisation of 3G spectrum charges). This would put an additional pressure on operators’ bottom lines, especially on small players.
The launch of 3G services is likely to result in a structural shift in the Indian telecom industry. With no single player acquiring pan-Indian 3G spectrum, the process of consolidation will be faster. The increasing pressure on profitability and the need to gain scale could force players without 3G spectrum and new entrants to merge.
Dolly Khattar
