India’s mobile operators, whose balance sheets are already stretched, will face additional obstacles following the country’s spectrum auction last week, with seven players spending $9.8 billion to expand their spectrum holdings as competition intensifies.
“These spectrum wins will weigh on balance sheets and cash flows, as debt levels will rise materially for most operators,” warned Annalisa Di Chiara, a Moody’s VP and senior credit officer. “The operators will experience a reduction in their ability to fund further expansion or to absorb the effects of weaker profitability as competition intensifies.”
More intense competition is likely to drive tariffs lower, causing ARPU to contract and industry revenue and profitability to fall over the next 12-18 months, meaning that leverage levels could rise, Di Chiara said.
4G newcomer Reliance Jio, which finally launched service nationwide in early September, is offering voice, SMS and 4G data service for free as part of a trial until the end of the year. Its aggressive move is starting a price war as rivals respond with low-cost packages.
Growing demand for 3G/4G data services will continue to drive each company’s spectrum cost recoveries, Moody’s said. Operators such as Bharti Airtel, Idea and Vodafone, among others, will likely opt to defer their spectrum payments, mitigating the effect on cash flows. This option requires them to make upfront payments of 25 per cent or 50 per cent, depending on the spectrum band, within 10 days of the auction’s close, with the balance payable in 10 annual installments after a moratorium of two years.
In the longer term, Moody’s said the new spectrum will help operators maintain their competitive positions, support their strategies on data growth and enhance cash flow generation. Their high debt burdens may also pave the way for recapitalisation and further industry consolidation, which will ultimately benefit the stronger players.