Telecom: Extension of repayment tenure to help Vodafone & Idea most. Govt receipt to fall in initial years

The relief measures announced by the government for the debt-ridden telecom sector by extending the repayment tenure for spectrum to 16 years from 10 years and the relaxation of cap on spectrum purchase, is likely to benefit the combined entity of Idea-Vodafone the most among large players, as the merged entity could retain spectrum in key markets and significantly boost cashflows. The decision is further going to increase consolidation in a market facing serious debt related challenges, said market experts. Read more

It should be noted that the Cabinet earlier in March approved a relief package for the telecom sector by relaxing the spectrum holding cap and increasing the tenure to make payments to the government for spectrum purchase. The government has extended the repayment tenure for annual installments of deferred spectrum liabilities for mobile operators from 10 years to 16 years. The government also relaxed the overall cap on spectrum holdings from 25% to 35%. Further, intra-band caps have been removed and a cap of 50% on combined spectrum holding in the sub-1GHz band has been introduced in its place.

All this would mean that telecom companies such as Vodafone, Idea, Bharti Airtel and RJio’s aggregate payments during FY19-26 will reduce by Rs 56,500 crore or $8.7billion; however, beyond FY26, their aggregate payments will increase by $20billion due to higher aggregate interest payments.

CLSA Research in a note said, while this provides the sector cash flow relief over the next few years, it does not impact aggregate valuations given that the move is net present value (NPV) neutral. "The Idea-Vodafone are seen as benefitting the most in the near future as the merged company’s annual instalment is the highest at around Rs Rs16,000 crore compared to the current annualised EBITDA of Rs 10,000 crore. For Bharti (Airtel), the instalment and annualised EBITDA for India operations stand at around Rs 9,000 crore and Rs 23,000 crore, respectively, while that of RJio annual instalment is around Rs 4,500 crore," the note said.

Idea-Vodafone have a significantly higher spectrum liabilities of around $14 billion, compared to Bharti Airtel’s $7billion and Reliance Jio’s $4billion.

This extension of the repayment period is likely to boost Idea-Vodafone’s cumulative cashflow by Rs 10,500 crore or $1.6 billion over FY19-21. Bharti Airtel's cumulative cash flow over FY19-21 is likely to be boosted by Rs 5,000 crore to Rs 6,900 crore; and Reliance Jio’s cumulative cash flow will be boosted by Rs 2,700 crore.

The relaxation in spectrum cap will also help Vodafone and Idea combine as the ceiling on spectrum held by operators within a particular band has been removed, and instead a 50% cap has been proposed on the combined spectrum in the sub-1 gigahertz (GHz) band.

The Idea-Vodafone combined entity was exceeding the limit in Maharashtra, Gujarat, Kerala, Haryana and Uttar Pradesh (east). These markets account for 32% of the total Indian mobile market and the merged entity has a leadership position in all of them.

"The ability to retain spectrum aids its competitive position," Deutsche Bank said in a report. According to estimates, the total spectrum holding of Airtel is 2,200 megahertz (MHz), Idea-Vodafone combine is 1,860 MHz and Reliance Jio (including Reliance Communications) around 1,650 MHz.

Experts are also unanimous that the extension of repayment tenure will hit government receipts in the initial years. For FY19, the government has budgeted collections of Rs 48,700 crore or $7.6 billion from the sector, of which deferred spectrum payments are estimated at Rs 24,800 crore or $3.9billion.

CLSA said: "Under the revised timelines, we estimate the deferred payments in FY19 at Rs18,900 crore, a shortfall of Rs 6,000 crore or $1billion which will increase to Rs 7,400 crore or $1.2 billion from FY20. To offset this, the government may bring forward its plans to auction spectrum in second half of FY19."

However, overall the industry is not satisfied with the package. Some of the demands such as lowering of licence fees, spectrum usage charge (SUC) and GST rates, 100 per cent FDI through automatic route, and scrapping of Universal Services Obligation Fund (USOF) levy were not looked into. At the moment, the telecom operators pay taxes and levies of about 29-32 per cent, including 18 per cent GST, 8 per cent licence fee and 3-6 per cent spectrum usage charges.

Also, telecommunication companies had asked for a longer tenure of 20 years to pay for spectrum but the Cabinet settled for 16 years, based on suggestions from inter-ministerial group.

- TradeBriefs Bureau -