Telcos’ market capitalisation sinks under rising debt; shares tank by up to 23%

MUMBAI: The recent spectrum auction may have fetched a windfall for the government, but it has made telecom companies poorer by nearly Rs40,000 crore, which are staggering under the weight of rising debt.

The combined market capitalisation of telecom companies took a massive knock after shares of Bharti Airtel, Idea Cellular and Reliance Communications crashed by up to 23 per cent since January 1 this year. Leading fund houses such as Goldman Sachs, Credit Suisse, UBS, Standard Chartered and others have downgraded price targets of Bharti Airtel and Idea Cellular. They fear that a race for spectrum among telecom companies could bring down industry returns, as rising debt will hurt operators’ ability to invest and roll out new technologies, which would eventually lead to higher tariffs and reduced services for consumers.

“Bharti Airtel and Idea Cellular will make incremental payments for spectrum. These companies will also face higher competition from Reliance Industries’ R-Jio in 14 circles. Thus, we have cut the price target of Bharti Airtel by 15 per cent to Rs350, and Idea Cellular by 17% to Rs157, due to a fall in core business valuation,” said Sachin Salgaonkar, analyst at Goldman Sachs, in a note.


The cumulative debt of telecom companies is pegged at over a staggering Rs2.5 lakh crore. Industry experts say this is going to impact the industry and subscribers, and though the auction has raised a lot of money for the government, much of this will end up as debt on the balance sheets of mobile operators.

Telecom companies have complained that they were forced to escalate bids to exorbitant levels to retain airwaves in the 900 Mhz band and are concerned that rising debt levels could crimp investment in network expansion. Analysts also warned that increased competition in 4G services may bring down tariffs for such services.

Vodafone has bid the most in the recent auction at Rs19,600 crore, followed by Bharti Airtel at Rs18,530 crore. Aditya Birla Group’s Idea Cellular will pay around Rs10,400 crore while Reliance Jio bid a total of Rs11,000 crore. “The spectrum auctions have resulted in Rs61,000 crore revenue to the government, but all of which will show up as additional debt for an already leveraged industry,” said Sunil Tirumalai, analyst at Credit Suisse, in a note. “The spectrum auctions outcome had some surprises, including a destructive war for the 900 MHz among the top three players. We do not subscribe to the view that tariffs can continuously go up, especially with the entry of a well-capitalised new contestant,” Tirumalai added.

Rating company Fitch said, “Bharti Airtel, Idea Cellular, Vodafone India, Reliance Jio and Reliance Communications could be among the six or seven operators left standing after a bout of consolidation hastened by the recent auctions.”

Recently, Bharti Airtel acquired smaller rival Loop Mobile for around Rs700 crore. “We expect higher spectrum prices to erode Airtel and Idea’s share value, as the potential impact on FY16 EPS is seen at around 15 per cent. We have downgraded Idea’s price target to Rs145 from Rs190, and Bharti Airtel’s to Rs355 from Rs394 earlier,” said Rahul Singh of Standard Chartered, in a note.