Decision on spectrum, payment norms to benefit Idea-Voda merged entity the most

The government’s decision to extend the deferred spectrum liability payment period to 16 years from the current 10 will benefit the merged company of Idea Cellular and Vodafone India the most, with the installment amount declining by around 30% annually. However, since the net current value would remain intact, the benefit is only in terms of cash flow as the amount due in initial years would be less, but increase towards the later years. The merged entity will also benefit the most because of the decision to raise the spectrum caps. Analysts have estimated that annual payments of Bharti Airtel and Idea can go down by around Rs 1,300-1,700 crore in the next two years. It will also aid small operators like Aircel in selling their spectrum. On Wednesday, the Union Cabinet approved the Department of Telecom’s proposals for relaxation in spectrum cap norms as well as increasing the deferred payment period for the airwaves. According to Deutsche Bank’s market research arm, the Idea-Vodafone merged firm benefits the most among the larger players as the extension of tenor would lead to 30% lower annual installment on spectrum. “Idea-Vodafone merged company’s annual installment stands around 16,000 crore compared with a current annualised Ebitda of Rs 10,000 crore. For Bharti, the installment and annualised Ebitda for India operations stands around Rs 9,000 crore and Rs 23,000 crore, respectively.

Jio’s annual installment stands around `4,500 crore. The longer tenor would reduce the annual installment by around 30%, which would significantly aid the mid-term cashflows for the merged company,” it added. Bharti leads the tally with the highest spectrum holding of 2200 MHz, followed by Idea-Vodafone merged firm (1860 MHz) and Jio including RCoM (1650 MHz), it said. Morgan Stanley said the decision provides some relief to the free cash flows of operators in the near term. Bharti’s annual spectrum payments would reduce by Rs 1,400-1,700 crore, around 20% over FY19-20. “However, the interest rate on the deferred spectrum liability is unchanged, so, the impact is net present value is neutral. We see around 15% downside risk to the government’s FY19 budgeted revenue estimates from the sector,” the brokerage added. Goldman Sachs, too, said the decision to extend the installment period should help ease some pressure on short-term liquidity of the operators and estimates around $200 million of higher cash flows for Bharti and Idea in FY19. “This is likely to be particularly beneficial for Idea, which has a net debt to Ebitda ratio of >7x (3Q18), but does not impact Bharti and Jio much,” it added.