Friday, May 21, 2010

India - The very expensive 3G auctions are reducing the credit ratings of mobileoperators

[cellular news] Fitch Ratings says that India's just concluded 3G licences and spectrum auction will have a negative impact on the credit metrics of most private telecom operators in the short to medium term. In a report to be published shortly, the agency estimates the high up-front licence and spectrum fees would significantly raise net debt levels for most of the telcos -- and financial leverage can accordingly be expected to deteriorate -- assuming Indian telcos fund their purchases at the auction through debt.

Fitch estimates that the net debt/operating EBITDA ratio of most of the telcos will rise between 1.0x to 2.5x. This is likely to go up further after India begins a separate broadband wireless access (BWA) auction, scheduled to start in May 2010.

Most of India's telecom operators have high debt levels, with the exception of public sector telcos MTNL, BSNL, and Bharti Airtel. Moreover, all telcos are facing wireless margin pressures due to intense price competition in the over-crowded industry. The Indian wireless market is highly competitive, with 10 operators (including MTNL and BSNL as one) competing in each of the 22 telecom circles as of March-2010, and two more operators having recently launched operations. In addition, a fragmented win of 3G licenses across the 22 circles suggests that the competitive intensity is unlikely to abate in the near term.

The 3G spectrum on 2.1Ghz bundled with the 3G licence will be allotted to the winners during the second half of financial year 2010 (2HFY10). The key benefits to the auction's winners are, first, the potential for higher non-voice revenues to offset declining ARPU in the medium to long term; and, second, the additional spectrum allocation of 5Mhz each (compared with 4.4Mhz to 9Mhz currently for 2G operators) provides a competitive edge over other telcos in terms of higher network capacity and better service capability. Fitch notes that Indian telcos have lower non-voice revenues as a percentage of total mobile revenues compared to Asia-Pacific peers. For e.g. Bharti's non-voice contribution to mobile revenues at around 11% is much less than the 15%-30% for some of the leading telcos in other Asia-Pacific countries.

Also, with the imminent adoption of mobile number portability (MNP), Fitch expects the 3G winners to have a clear edge in the acquisition and retention of high-ARPU subscribers. At the same time, the agency does not expect the incremental 3G capex to be significant.

Fitch: India's 3G Auction Adds to Telecom Sector Credit Woes

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