Airtel and Vodafone Idea are under financial stress and the current market conditions will force them to reduce Capex and skip 5G spectrum auctions, the latest MTN Consulting report said.
The blog by Subramanian Venkatraman indicated that Vodafone Idea is on the verge of bankruptcy.
Indian telecoms, which have a collective debt of almost INR 7,800 billion or $110 billion, have little cash left for future investments including the upcoming 5G spectrum auctions, MTN Consulting said.
All three operators, Reliance Jio, Bharti Airtel and Vodafone Idea have been ramping up 4G network, according to a report by Deepti Chaturvedi at CLSA.
While there has been 1.4x jump in 4G base stations in the last 12 months and these doubled over the past 18 months, Reliance Jio accounts for 60 percent of sectors 4G base stations. Airtel too has increased its 4G base stations by ~60 percent over the past 18 months and as per TRAI data has 1.86x more 4G base stations vs Vodafone Idea.
India’s exorbitant $7 billion / 100MHz pan India 5G spectrum price auction will likely fail, says Deepti Chaturvedi at CLSA. However 2020’s likely failed 5G spectrum auction will be triggering onset of lower spectrum prices, a big sector positive.
The Supreme Court’s verdict on adjusted gross revenue (AGR) had significant financial implications on Airtel and Vodafone Idea. Vodafone Idea and Airtel reported combined losses of about $10.5 billion in Q3 as they set aside funds towards AGR dues.
Airtel and Vodafone Idea are liable to pay INR 216 billion ($3 billion) and INR 283 billion ($3.9 billion), respectively, towards AGR dues. Since Airtel’s 2Q19 revenues amounted to $2.98 billion and Vodafone Idea posted $1.62 billion, AGR is significant for both.
While both Airtel and Vodafone Idea are in trouble, Sunil Mittal-promoted Airtel has more options. It plans to raise $3 billion to pay the government, which could involve the sale of its stake in its tower arm Bharti Infratel.
Vodafone Idea has not made clear its plan. It is placed with piled up debt and huge subscriber losses. Vodafone Idea’s debt to equity ratio increased from 181 percent in 3Q18 to 487 percent in 3Q19. Vodafone Idea’s mobile subscriber base declined to 311 million in 3Q19 compared to 422 million a year back.
Vodafone Idea’s parent entities the Aditya Birla Group and Vodafone of UK are also shying away from making additional investments in the merged entity. With mounting losses and no backing from the parent groups, chances of revival for VIL are low. An urgent sale to a rival operator is possible, said MTN Consulting.
Mukesh Ambani-promoted Jio has not been impacted much by the recent court decision on AGR. Jio’s total fine amounts to $1.8 million, given that it started operations in India only three years ago. Reliance Jio will be net debt-free with spectrum related dues to pay after its restructuring.
The AGR ruling will be a major hindrance in the telcos’ ability to take part in 5G auctions. The suggested base price for 5G is marked at INR 4,920 million ($69 million) per MHz, with a minimum sale of 20 MHz blocks. This would mean investing around INR 100 billion ($1.4 billion) for 20 MHz. The recommended price for the same band in countries like Korea, Spain, the UK and Italy is up to 6 times cheaper.
For India’s telecomss, spectrum cost constitutes a significant portion of total Capex. Airtel and Vodafone Idea might not even bid for the upcoming 5G auctions at the current price in the wake of the current financial conditions.