Airtel and Jio have more than enough to finance the 5G spectrum auction

Bharti Airtel and Reliance Jio are unlikely to tap commercial banks to finance their spectrum auction purchases, said industry executives and analysts, as the initial outgo for buying 5G and other airwaves is likely to be less than ₹5,000 crore mainly due to relaxed payment terms offered by the government.

Telecom operators are preparing strategies for buying 5G airwaves in the auctions starting 26 July but unlike previous auctions, the stress on finances will be minimal because of healthy balance sheets of the top two carriers and war-chest of funding made available by equity investors in both companies, said analysts.

“Airtel and Jio have more than enough to finance the spectrum they buy in auctions this time, even if they buy pan-India 5G airwaves and additional airwaves in the 26Ghz band,” said an industry executive asking not to be named.

“If telcos buy 100MHz pan-India in 3300MHz band, and 500MHz pan-India in 26GHz band—the cheapest band by base price—in the upcoming auction, annual payout for spectrum acquired in the upcoming auction would come to ₹1200 crore for Bharti, ₹2400 crore for Vodafone Idea and ₹1100 crore for Reliance Jio,” said Sanjesh Jain, vice president at ICICI Securities in a recent note to clients. He said that removing the floor of 3% spectrum usage charge (SUC) will bring annual savings of ₹2,100 crore for Airtel, ₹1,000 crore for Vodafone Idea and ₹2,300 crore for Reliance Jio on Q4 FY22 annualized adjusted gross revenue or AGR.

The government has relaxed payment terms for carriers in this auction by removing the mandate of paying 25% or 33% of the bid amount upfront, by scrapping the requirement of producing financial bank guarantees equal to the payments to be made every year. Spectrum bought in the auction will be allotted for 20 years, and payments for spectrum can be made in 20 equal annual instalments, with the first-year payment starting this fiscal expected to be a fraction of what telcos have been paying post auctions in recent times, the analysts said.

According to Moody’s, Airtel will largely fund its auction participation with cash and cash flow from operations.

On Thursday, the Competition Commission of India also approved Google’s investment of nearly $1 billion for 1.28% stake in Airtel.

Motilal Oswal Securities said in a report that Airtel is entering a phase of high free cash flow growth amid tariff hikes and higher earnings before interest, taxes, depreciation and amortization (Ebitda) outpacing capital expenditure.

“We expect Bharti to generate free cash flow post-interest of ₹25,100 crore / ₹36,800 crore i.e. 22%/47% of its net debt in FY23/24E, respectively,” Motilal Oswal said, while estimating Airtel’s total spending at ₹15,000- ₹20,000 crore in the upcoming 5G auction. For Reliance Jio, which raised over ₹1 trillion from Meta, Google and other investors in the past two years, financing the 5G auction is unlikely to pose any challenge.

“The amounts this time are very small, so for a large profit making company like Jio, it should not be a problem,” the telecom sector expert said on the condition of anonymity.

However, loss-making Vodafone Idea may have to look at banks among other credit options, even as the government has returned ₹5,000 crore bank guarantee to the carrier.

“The much-awaited capital raise remains critical to provide immediate liquidity and investment in network given the low Ebitda in FY23E, even after the tariff hikes,” according to Motilal Oswal.

Airtel, Vodafone Idea and Jio declined to comment to emailed queries. Livemint