The two proposals cleared by the Union Cabinet last week to ease the burden on the telecom sector might not completely mitigate the industry’s discomfort, as experts believe that while the overall cash flow of the operators towards spectrum payouts may be lowered but the benefits made initially will go away after few years. Further, the easing of the spectrum cap, as recommended by the sector regulator, will, for the time being, benefit only those operators that are undergoing consolidation.
Last week, the Cabinet granted its approval to the proposal for extending the time period of deferred payments for spectrum — which means operators can now pay the deferred spectrum liability over a period of 16 years against the current 10 year — and the changes in limit of spectrum held by operators.
In September, the Telecom Commission had accepted the recommendations of the inter-ministerial group about raising the deferred spectrum payment period from 10 years to 16 years. Currently, if operators choose to make deferred payment for spectrum won in an auction, they have to make 10 equal installments after two years of moratorium period. The Telecom Commission also approved replacement of the prime lending rate (PLR) with the marginal cost of funds-based lending rate (MCLR) for the delay in payments by operators on licence fee and spectrum usage charges.
According to a senior telecom industry executive, on account of this, the deferred payment liability for all operators during the peak payout years comes down from about Rs 31,500 crore to Rs 21,200 crore. However, the difference in payout during the initial years is expected to taper off till the year 2026 and will eventually exceed the outflow according to the current system, the executive said on condition of anonymity.
Morgan Stanley, in a note to its clients, said that even as the move would provide some relief to the free cash flow of the operators, the impact on net present value (NPV)-basis will be neutral. “Airtel’s annual spectrum payments would reduce by Rs 14-17 billion (Rs 1,400-1,700 crore), approximately 20 percent over FY2019/20. However, the interest rate on the deferred spectrum liability is unchanged, so the impact is NPV neutral. We see approximately 15 percent downside risk to the government’s FY2019 budgeted revenue estimates from the sector,” the research note said.
Deutsche Bank Markets Research, in a report, said: “Idea/Vodafone mergeco’s (merged company) annual installment stands at around Rs 160 billion (Rs 16,000 crore) compared to a current annualized EBITDA of Rs 100 billion (10,000 crore). For Bharti, the installment and annualized EBITDA for India ops stand at around Rs 90 billion (Rs 9,000 crore) and Rs 230 billion (Rs 23,000 crore), respectively. Jio’s annual installment stands at around Rs 45 billion (Rs 4,500 crore). The longer tenor would reduce the annual installment by (around) 30 percent which would significantly aid the mid-term cashflows for the mergeco.”
“In a nutshell, the industry’s pain is postponed to future years with the hope that it will be sufficiently healthy at that time to withstand this pain,” the aforementioned executive said.
Similarly, the measure to increase the overall spectrum holding limit by any operator to 35 percent from 25 percent and an overall 50 percent cap on sub-1 GHz spectrum, is only expected to benefit companies such as Idea, Vodafone, Jio and Reliance Communications, which are undergoing consolidation, given that without the relaxed ceilings the operators would have had to surrender airwaves in certain circles to meet the criteria.
“The Idea/Vodafone mergeco was exceeding the cap in Maharashtra, Gujarat, Kerala, Haryana and Uttar Pradesh (East). These markets account for 32 percent of the total Indian mobile market and the mergeco has a leadership position in them. The ability to retain all its spectrum aids its competitive position,” Deutsche Bank said in its note, adding that currently while Bharti Airtel holds 2,200 MHz spectrum across the country, Idea and Vodafone on a combined basis hold 1,860 MHz, and Jio along with Reliance Communications holds 1,650 MHz of spectrum.
Notably, during the consultation process by the Telecom Regulatory Authority of India (TRAI), while all the operators towed the same line pushing for spectrum cap to be relaxed, one operator – Aircel, which is on the verge of shutting down due to financial problems, said that an “intervention at this stage to the (spectrum) caps would be akin to being supportive of measures which only help in addressing financial challenges of a single operator or couple of operators intending to merge, while remainder operators which are servicing the subscribers within the established bounds would be now exposed to stronger competitors with holdings solely enabled by modifications to caps”.
However, TRAI argued that spectrum holding limits prevailing at that time were imposed when there were 6 to 10 telecom service providers (TSPs) in a given circle and the average spectrum holding of operators in India was lower than the international standards. “After the ongoing consolidation in the sector, the number of TSPs in a LSA (telecom circle) may be much less. Some merger proposals have already been filed while some are still in process. Merger and acquisition (M&A) guidelines allow holding 50 percent of market share in terms of subscriber base as well as revenue. Therefore, 25 percent cap on overall spectrum holding may put constraint on the ongoing consolidation phase. It may also restrict the capability to purchase additional spectrum in the future auctions,” TRAI said in its recommendations, adding that any constraint due to spectrum cap may dampen the demand prospects in the future auction. – Indian Express