At a six-year low last month, the Bharti Airtel stock would have caught the attention of serious investors. Mukesh Ambani, for one, must have given it more than a second look, wishing there had been more of the stock floating around for Reliance Industries Limited (RIL) to pick up. After all, RIL has made no secret of its aspirations of re-entering the telecom space, having armed itself with a pan-India BWA licence, and most analysts are betting the conglomerate will not stay out of the voice space. The senior Ambani would have loved to get his hands on India?s biggest telco even if it?s overloaded with debt?net debt to ebitda for Bharti, at the end of March 2012, was 2.8 times and the net debt to equity 129%?because he has both the balance sheet and cash flows to do it.
RIL is sitting on R70,000 crore of cash and spewing more of it each year, so much so that shareholders are weary of wondering what it will do with the money. In contrast, Bharti?s balance sheet is weighed down by borrowings: the acquisition of Zain?s operations in Africa in early 2010 led it to borrow over $8 billion. One brokerage labelled the valuation as ?eye watering? given it was at a 40-50% premium to the valuation being contemplated for the MTN acquisition and cautioned at the time that the deal could ?materially stress Bhart?s balance sheet?. In mid-2010, Bharti forked out some $2.6 billion for 3G spectrum in 13 circles?or roughly 14% of the firm?s current market capitalisation?and the firm?s long-term debt stands just short of R50,000 crore. That in itself wouldn?t have been such a bad thing but for the rather turbulent regulatory environment and the intensely competitive environment that the telcom industry finds itself in today. The 2G scam and the Supreme Court?s cancelling 122 licences given out to telcos since 2008, vitiated the atmosphere and has resulted in the government pegging the reserve price for auctions at R14,000 crore. Moreover, it?s going to take longer than earlier envisaged with the auction being held in January 2013. Also, while Trai had recommended the spectrum usage charges be lowered to 3%, this may not come through.
To cut a long story short, Bharti, a first mover in India?s telephony game with efficient spectrum in the 900 MHz band is now faced with the unpleasant prospect of either giving up its efficient 900 MHz spectrum or buying it back at the auction rate, which is twice that fixed for the 1800 MHz spectrum that is to be auctioned. Between Vodafone, Bharti and Idea, the tab for the refarmed spectrum could be close to R1,50,000 crore. Again, several of Bharti?s licences will come up for renewal in 2014 and 2015;and almost immediately, it will have to pay for the ?extra? spectrum it holds on the basis of the price paid in the forthcoming auction.
Spectrum is not cheap?the price of 5MHz pan-India spectrum in the 1800 MHz band is R14,000 crore compared with R1,650 crore for 5MHz in 2008 and Bharti?s outgo on spectrum could be least $3 billion. Net-net, Bharti?s net debt could be R50,000 crore by March 2015 from about R65,000 crore currently
In the meantime, the going could get tough with not just capex but also operating expenditure?sales, marketing?increasing. Bharti?s margins in the three months to June fell a steep 300 basis points: although traffic grew an impressive nine billion minutes, it came at the cost of lower ARPMs indicating just how competitive the space remains. Subscriber numbers for Bharti, Idea and Vodafone fell in August, the first time in twelve years, but that?s the result of them weeding out inactive customers. The 3G piece has been disappointing for the industry as a whole; analysts point out that 3G rates have been cut 7x in the last six months and sequential data revenue growth is on the decline. The relatively high charges are a challenge, but if customers are able to buy cheaper handsets, the picture could change. Without doubt though, the competition is keen. And this without RIL even having stepped into the arena.
Media reports say Bharti has completed the first phase of its transformation from a telco driven primarily by voice revenues to one that?s also focussed on data services; data currently contributes 5% to the telco?s revenues. But since RIL could well be a player in the voice space?given data services haven?t take off as anticipated, it would possibly bundle the two by buying an existing voice player?the Ambani strategy would need to be closely watched. Should RIL decide it would launch voice services through an incumbent operator, there would be no addition to network capacity, a plus for Bharti. Chances are high that RIL will not go the greenfield way since that would delay time to market. Moreover, it might want to roll out data and voice services simultaneously, so acquiring capacity would be the quicker way to achieve that. There are those who point out that RIL could not make a success of its foray into telecom the first time. That, however, may be of little comfort to Bharti since as we have seen from the entry of the likes of a Uninor, all that the newcomer has to do is to unsettle the tariff structure, and then watch the incumbents bleed. Given RIL?s ultra-deep pockets, and the fact that a newcomer can never be held guilty of predatory pricing, Bharti?s shareholders have enough reason to worry.
shobhana.subramanian@expressindia.com
