Spectrum pay, network capex to keep telcos' cash flow negative

Payment for spectrum purchase and investments in network expansion will keep telecom operators' free cash flow negative, says a report.
"Ind-Ra expects debt burden to rise for the top telcos, with the increase in spectrum and non-spectrum debt capex. In addition to the upfront spectrum payouts in financial year 2017, network capex needs to be ramped up, which will keep free cash flow (FCF) negative," India Ratings and Research (Ind-Ra) said in a report.
The launch of life-time free voice calls by Reliance Jio Infocomm Ltd (RJio) has threatened the major contributor of telcos revenues, namely voice calls, it said.

Ind-Ra expects RJio's entry strategy to squeeze operational cash flows of the sector in Financial year 2017-Financial Year 2018.
"Idea reported negative FCF ,post capex and spectrum payment, of Rs 1,180 crore in financial year 2016. Bharti had a positive FCF of Rs 14,800 crore in FY16, mainly supported by Rs 5,700 crore sale proceeds from tower assets and Rs 6,770 crore from sale of investments," Ind-Ra said.
The agency said there were no major surprises in the spectrum auction and as expected by Ind-Ra spectrum bidding was rational, therefore Ind-Ra maintains its outlook on the sector as 'Stable to Negative'.

As against spectrum worth Rs 5.63 lakh crore, government received bids worth Rs 65,789 crore.

Vodafone's India took home Rs 20,280 crore worth of spectrum. Bharti Airtel bought Rs 14,244 crore, Idea Cellular Rs 12,798 crore and newcomer Reliance Jio spent around Rs 13,672 crore on spectrum buying.
"The immediate concern for the auction winners will be to put in place an optimal funding mix to meet the upfront Rs 32000 crore and subsequent staggered payments," Ind-Ra said.
As per demand note issued by the Department of Telecom, Jio needs to pay Rs 5,930 crore; Idea Rs 6,399 crore, Vodafone Rs 10,139 crore; Airtel Rs 7,121 crore, Tata Teleservices Rs 2,309 crore, RCom Rs 32.5 crore and Aircel Rs 56 crore as upfront amount by October 20.

Incumbent operators have the existing balance sheet strength to raise funds from the domestic or global markets, it said.
"However, identifying the right long term funding mix to optimise the cost of funds and the monetisation of non-core assets to reduce the debt burden will be crucial for the credit profile," the agency said.
Ind-Ra said that Vodafone raised equity of Rs 47,700 crore, which will be used for the upfront spectrum payment and also support additional capex while Idea has incremental capex plan of Rs 1,000 crore post the spectrum acquisition, and its upfront payout for the spectrum will be part-debt funded given its moderate cash balances.

"Bharti Airtel Ltd had Rs 2,050 of cash and equivalents at end of first quarter of financial year 2017; hence part debt funding could be used for the upfront spectrum payment," Ind-Ra said.