Tuesday, October 15, 2013

Runaway Debt: Telecom companies take measures to deleverage their balance sheets
The Indian telecom sector’s debt burden has risen to unprecedented levels. The total financial liabilities of telecom companies are estimated to have witnessed a compound annual growth rate of 19 per cent from Rs 827 billion in March 2009 to Rs 2.5 trillion in March 2013.

Bharti Airtel is the most leveraged telecom company with a debt of Rs 583.8 billion as of June 2013. Reliance Communications (RCOM) and Idea Cellular have liabilities of Rs 388.64 billion and Rs 102.11 billion respectively. Aircel reportedly owes Rs 240 billion to lenders. RCOM has the highest debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio (5.65) among all the operators, followed by Airtel (2.23) and Idea Cellular (1.39).

These companies had raised considerable capital to fund their capex and opex needs as well as to buy airwaves in the 3G and 4G spectrum auctions in 2010. However, the invested capital has not yielded returns yet as voice tariffs have remained almost stagnant while data services have witnessed slow growth.

Caught in a circle of low profit growth, the operators have limited ability to pare debt, while high interest costs continue to hit their bottom line. This has impacted their ability to make further investments in buying additional spectrum, expand into high-cost rural areas, etc.

In this scenario, Indian operators have proposed lower capex targets as compared to companies in other countries. According to a report by Fitch Ratings, Indian operators’ combined capex guidance for 2013-14 is about 19 per cent of expected revenues, as compared to 30 per cent in China and Indonesia. For 2013-14, Bharti Airtel, Vodafone India, RCOM and Idea Cellular have an investment target of up to $2.3 billion, $1 billion, Rs 15 billion and Rs 35 billion respectively.

Macroeconomic concerns

The recent depreciation of the rupee against the US dollar is likely to worsen the situation for operators, which had relied on unhedged foreign borrowings. If the trend continues, the cost of servicing debt will increase further, thereby severely impacting the profitability of these players during the loan term.

The impact of the fall of the rupee was evident from Bharti Airtel’s quarterly result for April-June 2013. The operator’s finance costs increased by 58 per cent year on year to Rs 11.67 billion, owing to a 9.8 per cent rupee depreciation during this period. Between July 1, 2013 and September 1, 2013, the value of the rupee declined further, by about 12 per cent, and interest costs are, therefore, likely to severely impact the operator’s profitability in the next few quarters.

RCOM and Idea Cellular will be similarly affected by the rupee depreciation in the near term, but the impact on the former will be offset partially as its submarine cable unit, Reliance Globalcom, earns revenues in US dollars.

Industry issues

Besides macroeconomic concerns, spectrum acquisition costs, one-time spectrum fees and regulatory requirements are likely to increase the debt burden of telecom companies. Operators have been asked to pay a one-time spectrum fee for holding excess spectrum in the 800 MHz, 900 MHz and 1800 MHz bands. They are also required to comply with roll-out obligations, which would require significant investments in rural areas that have so far witnessed low 3G penetration. In addition, the government has mandated service providers and tower companies to conform to the new radiation emission norms and use renewable energy to operate towers.

Besides, operators have to raise capital for acquiring spectrum. As the government has not taken a final decision on spectrum sharing/trading, operators would participate in the upcoming spectrum auctions to increase their holding of airwaves to cater to the rising bandwidth demand and improve user experience. Even if the government sets the reserve price for spectrum at 50 per cent lower than that in the previous auction, operators will have to make substantial upfront payments for buying airwaves.

The options for securing funds for network expansion and spectrum payments are limited. Domestic banks’ overexposure to the telecom sector has limited their ability to lend further funds, while raising equity through the secondary capital market is not a viable option in the current scenario of low market confidence. An alternative is to raise capital through private equity (PE) players; however, there are challenges given the low returns on investments in the sector. In this scenario, one way of securing capital is through divestment in the parent company as well as in subsidiaries.

Corrective measures

As service providers have little control over regulatory and macroeconomic issues, they are focusing on debt reduction measures such as a stake sale and monetisation of non-core assets to deleverage their balance sheets.

The following are the key debt reduction measures taken/proposed by select telecom companies...

Bharti Airtel

•The company raised $1.5 billion in two tranches through the sale of bonds in the international market in March 2013. While the first tranche of bonds worth $1 billion has a yield of 5.04 per cent, the second tranche has a coupon of 5.13 per cent.

•In June 2013, the operator sold 5 per cent stake to the Qatar Foundation Endowment for a total of Rs 67.96 billion.

•The company is planning to offload 25 per cent stake in its direct-to-home (DTH) business to PE players including Carlyle, or US-based Liberty Media.

•Bharti Airtel is also in discussions with UAE-based Etisalat for selling stake in its Sri Lankan operations for $110 million-$130 million.


•RCOM is at an advanced stage of discussions with PE firms to sell stake in its submarine cable unit Reliance Globalcom.

•It is also reportedly planning to merge its DTH business with Sun Direct. Subsequently, it plans to exit the merged entity and is expected to raise Rs 15 billion from the stake sale.


•The operator has secured Rs 80 billion from IDFC and Switzerland-based bank, Credit Suisse. While IDFC will provide credit worth Rs 45 billion, Credit Suisse will offer Rs 35 billion.


•Mahanagar Telephone Nigam Limited (MTNL) has raised Rs 10.05 billion from institutional investors through the sale of sovereign-guaranteed bonds. The bonds have a coupon of 17.14 per cent per annum.

•The company is planning to raise another Rs 30 billion through 10-year sovereign-guaranteed bonds.

Tata Communications

•The company has raised Rs 1.92 billion through the sale of land assets in Chennai. It intends to sell additional land assets in Mumbai and Delhi for a total of Rs 10 billion.

•The company raised Rs 22 billion through the sale of bonds, which have a guarantee from the Tata Group. The three-year bonds have a coupon of 4.25 per cent.

Tulip Telecom

•Tulip Telecom has received approval for its debt restructuring proposal from lenders. It has been given a 30-month moratorium on the principal and an 18-month moratorium on the interest. The interest rate on loans has been reduced from 13 per cent to 11 per cent.

In addition, telecom companies are taking steps to reduce their opex through partnerships and collaborations. Reducing opex would result in higher profits, which can be used for debt repayment. Collaborations also enable operators to earn revenue through sharing of network infrastructure. Of late, the trend of sharing network infrastructure has gained momentum.

For instance, RCOM has tied up with Reliance Jio Infocomm Limited for sharing the former’s intercity optic fibre network and towers for a total of Rs 132 billion. RCOM has also signed 2G roaming agreements with Aircel and Loop Mobile for the Mumbai circle, while Tata Teleservices Limited has partnered with Aircel for 2G roaming in the Bihar circle.

Exploring new avenues for revenue growth

Telecom companies have realised that offloading stake and monetising non-core assets will only result in partial debt reduction. A combination of debt reduction measures and a new revenue growth model would be required to deleverage balance sheets. As a result, several companies are focusing on emerging business opportunities in cloud computing, data centres and the enterprise segment, among others, to increase revenues.

In the past year, several telecom operators have tied up with IT and technology firms to offer cloud computing services to their enterprise customers. For instance, Airtel has partnered with Microsoft India to offer the latter’s Office 365 business productivity solutions to small and medium enterprises. Aircel has also collaborated with NEC India to provide services such as customer relationship management, enterprise resource planning, the human resources management system and videoconferencing. Bharat Sanchar Nigam Limited has collaborated with Dimension Data to offer enterprise cloud services and is targeting 25 per cent revenue growth from the enterprise business.

Operators and service providers are also considering growth opportunities in the data centre services business. While currently most data centres are owned by IT companies, telecom players are increasingly looking at this business opportunity. They are also investing in setting up data centres to support cloud services and virtualisation.

Government efforts to revive sector

Considering the high debt burden of telecom companies, the government has relaxed norms for raising capital. For instance, the Reserve Bank of India has allowed telecom service providers that won spectrum in the 3G auction to refinance their rupee loans through external commercial borrowings (ECBs) till March 2014. ECB financing is a preferred route for raising capital as it allows companies to substitute high-cost domestic borrowings with low-cost foreign funds. This leaves cash reserves for network deployment, spectrum acquisition, etc.

Granting infrastructure status to tower companies is another important step taken by the government. This offers benefits such as loans at lower interest rates (3-4 per cent), viability gap funding and tax holidays, low customs duty and exemption from excise duty on equipment. These benefits would allow tower companies to adhere to radiation norms and the government’s renewable energy mandate.

The government has removed the foreign direct investment cap for the telecom sector to encourage capital infusion by foreign players. The move is expected to benefit players with foreign ownership such as Sistema Shyam TeleServices Limited and Uninor, which can now raise capital beyond 74 per cent from their parent company. However, foreign telecom companies which intend to enter the Indian market will not do so until the government establishes a strong merger and acquisition framework as deploying networks from scratch will pose major challenges and delay returns on investments.

The way forward

Going forward, telecom companies will face several issues in reducing debt. The huge debt burden of telecom companies will continue to impact their bottom line in the near term, thereby limiting the capital available for investment in network expansion and new service launch. Meanwhile, the options for raising capital are limited for most companies as banks are reluctant to lend and the confidence level in financial markets is low. The recent currency depreciation has only added to the debt woes of telecom companies.

That said, the sector is showing some signs of improvement. Tariff rationalisation and a steady increase in data usage are helping operators generate higher revenues. Implementation of the unified licensing regime is likely to provide regulatory clarity, which will help the sector attract investments. It will be interesting to see whether telecom companies can capitalise on these developments to overcome the debt tide.

Courtesy: Tele.net.in