India's telecom sector, ravaged by an intense price war, huge debts and high costs, has finally got some relief from the government in the form of eased spectrum holding caps and extension of payment period for the spectrum acquired to 16 years from the existing 10 years; moves the government hopes will drive more investments and facilitate consolidation in the sector.
The cabinet approved raising the overall spectrum cap per operator in a telecom circle to 35 per cent from the current 25 per cent. This will be of particular importance, coming in the wake of a wave of mergers and acquisitions in the industry.
Vodafone and Idea Cellular, India's second and third-largest telecom companies, respectively, are expected to complete their merger this year. With the cabinet easing cap on spectrum holdings, the two will no longer have to sell some of the spectrum in a few circles, where otherwise they would have breached the existing limits post the merger.
Similarly, Bharti Airtel, which is acquiring Norwegian firm Telenor's India business, while also merging Tata Teleservices' consumer mobile business, will also stand to gain from the move.
The increased caps will also open the doors for the newest entrant Reliance Jio to acquire more spectrum. The Mukesh Ambani-owned firm had inked an agreement with younger brother Anil Ambani's Reliance Communication to acquire its assets.
Apart from raising the overall spectrum cap, the current intra-band cap has also been removed. Instead, there will be a cap of 50 per cent on the combined spectrum holding in the sub-1 GHz bands (700 MHz, 800 MHz and 900 MHz bands). There will be no cap for individual or combined spectrum holding in above 1 GHz band. "Cabinet’s approval of recommendations is a huge positive step for the telecom industry. The increase in spectrum holding limit to 35 per cent will be helpful considering the ongoing consolidation in the industry," said Hemant Joshi, partner at consulting firm Deloitte.
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Over the years, the incumbent telecom operators like Airtel, Idea and Vodafone, among others, spent huge money on acquiring spectrum.Their earnings have taken a hit in recent years. On the one hand, the total debt remains elevated (telecom sector debt estimated at close to Rs 7 lakh crore) and on the other, a price war led by Reliance Jio and the efforts of rivals to match the offers, has dented margins.
In that background, the move to extend payment period for the acquired spectrum will help as the pressures on cash flows will ease.
"The debt extension will give some immediate cashflow relief," said Rajan Mathews, director general, Cellular Operators Association of India.
However, more comprehensive steps are needed, say experts.
"While the increase in repayment term from 12 to 16 years will reduce the immediate cash outflows to some extent, the fundamental issue of Rs 7 lakh crore debt, race to the bottom on pricing of mobile services, significant annual servicing costs, declining revenues—need to be addressed comprehensively to make the sector viable," said Deloitte's Joshi.
A foreign broking firm said that incumbents will benefit more from the move to extend payment period on spectrum, but overall, it is just a small step to improve balance sheets. The brokerage expects the price-led competitive intensity to remain elevated till market shares improve.
Telecom stocks saw some buying activity on Thursday following the cabinet relief. Idea Cellular was trading 0.4 per cent higher at Rs 79.90 on the BSE, Bharti Airtel gained near 1 per cent at Rs 407.05 and RIL was also up close to a per cent at Rs 899.70.