Morgan Stanley expects increased pressure on mobile tariffs and rising capex requirements to fund spectrum purchases and data network rollouts to create cashflow challenges for India’s Bharti Airtel and Idea Cellular for the next few years.
The brokerage said slow data growth and the pending entry of Reliance Jio into the market will further limit Airtel’s and Idea’s (the country’s number one and three operators, respectively) free cashflows over FY16-18, warning that participating in the next spectrum auction in June-July could “worsen the scenario and dent their balance sheets”, the Economic Times reported.
“We project a lack of free cashflows for both Bharti and Idea and single-digit return on capital employed,” said Morgan Stanley in a client note.
Morgan Stanley noted that Jio and Reliance Communications, which finalised spectrum sharing and trading deals in the 800MHz band earlier in the year, are the sole holders of pan-India sub-1GHz spectrum.
Airtel reported an 11 per cent year-on-year decline in its consolidated operating free cashflows in its fiscal Q3 ending 31 December, primarily driven by higher capex.
Analysts at Morgan Stanley, the Times reported, expect interest and amortisation costs linked to last year’s spectrum auction to have a bigger impact on Airtel’s and Idea’s performance in Q4 FY16, with both firms recognising the liabilities in their books.
The brokerage expects Airtel’s interest costs to increase 4 per cent in FY16 and 2 per cent in FY17, while Idea’s interest costs will jump 8 per cent in FY16, 7 per cent in FY17 and 3 per cent in FY18.
Morgan Stanley also reduced the operators’ earnings forecasts. It cut Airtel’s by 7 per cent, 1 per cent and 5 per cent for the next three fiscal years, and Idea’s by 7 per cent, 13 per cent and 14 per cent for FY16-18. It noted that Idea is at a higher risk, being a pure wireless play with a relatively small balance sheet, and falling voice minutes and rising capex.