According to Fitch Ratings, the recently concluded spectrum auction is expected lead to consolidation in the telecom sector and further strengthening of tariffs.
The rating agency expects the number of players in the country to come down from 12 to six or seven, with smaller operators likely to acquired by the larger ones. Lack of spectrum will lead bottom six operators to exit the Indian market. Going forward, Tata Teleservices Limited, Sistema Shyam TeleServices Limited and Videocon Telecommunications are likely to be acquired by larger operators in a bid to improve their financial position.
Meanwhile, consolidation in the sector is likely to improve operating profitability and cash flow of large operators and return pricing power to the larger operators in the medium term. However, debt-funded spectrum and merger and acquisition costs will weigh on leverage in the short term.
Fitch Ratings states that post consolidation, six to seven operators will emerge, including the leading top four operators – Bharti Airtel, Idea Cellular, Vodafone India and Reliance Communications, along with a new entrant – Reliance Jio Infocomm Limited (RJIL). In the third round of spectrum auction, the government had put up about 385 MHz and 46 MHz of spectrum up for auction in the 1800 MHz and the 900 MHz band, respectively. The auction lasted for 10 days and the government received bids worth Rs 611.62 billion.
While Vodafone India put in bids worth Rs 196 billion, Bharti Airtel and idea Cellular put in bids worth Rs 185.3 billion and Rs 104 billion, respectively. The new entrant RJIL had put in bids worth Rs 110.54 billion.
According to Fitch Ratings, the top three operators and RJIL placed aggressive bids and won 76 per cent of the spectrum offered, paying prices which were 84 per cent and 29 per cent higher than the reserve prices for the spectrum in the 900 MHz and 1800 MHz, respectively. The rating agency is of the view that leverage will deteriorate for the winners in the short term, due to the largely debt-funded spectrum costs. However, cash flows for the larger operators will continue to be manageable, as these companies have the option to pay spectrum cost in installments – one-third upfront, and the balance over a period of 10 years.
The ratings agency underlines that RJIL, with cash reserves of $ 15-16 billion, could buy a GSM player to bridge the spectrum gap to provide both voice and data services.
