High spectrum cost may weigh on FY17 earnings of Airtel, Idea, RCom

Via The Economic Times | Apr 13, 2015

Earnings of telecom companies Bharti Airtel, Idea Cellular and Reliance Communic
ations may take a sharp hit in 2016-17, weighed down by higher amortisation and
interest costs after buying expensive spectrum, analysts say. Increased costs, a
long with a likely delay in the launch of Reliance Jio Infocomm's service, may r
esult in some tariffs going up, they said. Market leader Bharti Airtel's net pro
fit may dip 8 percent in the financial year starting April 1, 2016, US brokerage
Morgan Stanley estimated, while that of Idea Cellular and are set to decline 27
percent and 26 percent, respectively, factoring in higher interest and deprecia
tion outflows. Idea and Bharti Airtel's "incremental interest costs will be to t
he tune of Rs 1,000 crore/Rs 3,600 crore, and amortisation costs at Rs 600 crore
/Rs 2,200 crore in F16 and F17 respectively, following the last two auctions," M
organ Stanley said in a note to clients. RCom's amortisation cost is set to incr
ease by over Rs 2,000 crore on year in FY16 and just under Rs 3,000 crore in FY1
7. Interest cost is set to fall by over Rs 1,000 crore in FY16 and rise by about
Rs 1,600 crore in the following financial year, the brokerage said.
It noted that the telecom industry had spent over 90 percent of its revenue on t
he airwave auctions in February 2014 and March 2015 and this would lead to a hig
her net debt-to-operating income ratio due to costlier spectrum. It estimated Id
ea, Airtel and RCom's net debt-to-Ebitda (earnings before interest, taxes, depre
ciation, and amortisation) at 3.2 times, 2.2 times and 4.4 times, respectively,
in F2016, which would make their "balance sheets weaker." This will make consoli
dation tougher for companies with their balance sheets stretched and their need
to raise capital expenditure for data. Idea, with its limited 13-circle 3G play,
could face an additional Rs 8,200 crore payout to plug data spectrum gaps once
incremental third-generation airwaves are auctioned again, HSBC analysts indicat
ed. They said Bharti Airtel doesn't face this challenge because it has a blend o
f airwaves in the 900 MHz and 2100 MHz bands across 21 circles. Tariff increases
are inevitable, industry experts say, although some of them say the hikes may b
e staggered over the next three to six months on expectations Reliance Jio's 4G
launch will be delayed. Companies are expected to cut down on promotional freebi
es instead of actually increasing headline tariffs.
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