Shishir AsthanaMoneycontrol Research
Telecom companies have been battling headwinds for some time now. The recently concluded December-quarter numbers underline the stress in the sector. Bharti Airtel’s profit slumped by 55 percent from a year ago to Rs 504 crore in Q3 and analysts expect Idea Cellular to post a loss during the quarter. The companies are clearly impacted by Reliance Jio’s entry in the market.
What is of more concern than falling profits is the sharp rise in debt levels. Analysts expect that Idea Cellular will have net debt close to Rs 55,000 crore (from over Rs 41,000 crore in FY16), nearly 1.5 times its annual revenue. Bharti Airtel, too, has seen its debt at a consolidated level increase from USD 12.2 billion in September to USD 14.3 billion by December. In a scenario where companies are reporting lower revenues and profitability, servicing the high levels of debt will become an issue.
Companies are spending more on improving their infrastructure, especially data, as well as increasing their spending to tackle issues of call drops by investing in renting more towers. But apart from the expenditure needed to improve service quality there is one big expenditure that is recurring and dents company’s balance sheets: buying spectrum.
Spectrum purchases by way of auction have been a big factor in the ill-health of the telecom companies. In the current fiscal, telcos bought Rs 65,789 crore worth of spectrum in an auction from the government. Telecom operators were financially stressed by buying higher frequency spectrums (1,800/2,100/2,300MHz bands) and did not bid for the 700 and 900 MHz frequencies. Around 60 percent of the spectrum remained unsold. The government was expecting to garner Rs 4 lakh crore by sale of these premium segments: 700-900 MHz.
However, it seems the government has not learnt from its past mistakes. A Moneycontrol report says that it may set Rs 75,000-100,000 crore as spectrum revenue target in the coming Budget from spectrum sales.
Demonetisation combined with increased competition has shrunk company revenues and operating margins leaving little spare cash. The rise in debt levels can be attributed at least in part to having to fund spectrum purchases.
The Finance Minister would be ill-advised if he increased the budgeted spectrum revenue without taking into consideration the ground realities. In doing so it is threatening to severely injure if not kill the golden goose that was making a sizeable contribution to the government kitty every year.
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