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Airtel, Reliance Jio, Vodafone Idea Up The Ante With Higher Capital Commitments

“There are but two ways of paying debt: increase of industry in raising income, increase of thrift in laying out,” said Thomas Carlyle, a Scottish writer and philosopher. Indian telecom firms have tried all they could—raising revenues, cutting costs—but all of that has amounted to a few drops in the ocean when compared to their monumental debt.

Bharti Airtel Ltd, the best placed of the lot, with a debt to Ebitda ratio of about 4.2 times, lost its investment grade rating last month from Moody’s Investors Service. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

While the company already had plans to reduce leverage by selling its stake in Africa operations and in Bharti Infratel, its tower infrastructure business, it evidently believes that much more needs to be done.

Late last week, Airtel announced plans to raise as much as ₹32,000 crore, largely through a rights issue and selling perpetual bonds worth ₹7,000 crore. The move will bring down its debt to Ebitda to around three times, which can potentially get Moody’s to revisit the ratings downgrade, and result in better borrowing rates.

The need to bring down leverage isn’t the only reason driving telcos such as Airtel to raise large funds. “The capex intensity of the sector will continue to remain high. While 4G capex may be at its peak, we see 5G spends kicking in from next year,” says Rajiv Sharma, co-head of research at SBICAP Securities Ltd. Analysts at JM Financial Institutional Securities Ltd say, “The fundraise may provide (Airtel) the financial flexibility to participate in 5G spectrum auction in FY21.”

While companies are now saying that the reserve price for 5G spectrum is too high to even consider bidding, analysts say companies may not ignore the chance to upgrade for too long, especially given how aggressive they have been in the recent past with regard to upgrading their networks.

Airtel isn’t alone in its fundraising efforts. Vodafone Idea Ltd had earlier announced a rights issue of ₹25,000 crore. It was already walking a tightrope and now suddenly faces competition for public funds, with Airtel announcing a similar-sized issue.

Reliance Jio Infocomm Ltd decided late last year to hive off its fibre and tower assets and house them in two separate companies, a move that is typically associated with a plan to sell a stake to a strategic or financial investor at a later stage.

The big worry in all this is there is hardly any talk of raising income—as Carlyle suggests—and reducing leverage. In fact, in Airtel’s decision to raise what is being considered a larger-than-needed amount of capital, the worry is that cash burn will continue longer than what was earlier anticipated.

“It is better to be over-capitalized than under-capitalized amid the continued uncertainty in the Indian wireless market. A well-capitalized balance sheet is a must to fight the ‘brutal battle of capital and capacity’ that the Indian wireless market currently is,” say analysts at Kotak Institutional Equities in a note to clients.

Vodafone Idea comes across as the weakest placed in this brutal battle. Compared to peers Reliance Jio and Airtel, the company has been lagging in capital expenditure (capex), say analysts. As Rajiv Sharma of SBICAP Securities points out, “Government (department of telecommunication) dues coming up for payment in the next two years itself amount to ₹21,000 crore for Vodafone Idea, leaving limited scope for tactical investments such as 5G.”

The Indian telecom industry is experiencing the “escalation of commitment” problem, where the tendency to escalate capital commitments ends up being disastrous for firms, especially in hypercompetitive markets. The coffee wars in the US between Philip Morris’s Maxwell House and Procter and Gamble’s Folgers brands is a classic example, where both companies struggled to make money thanks to their fight for dominance.

As pointed out in a Mint article, citing research from Kotak, what the telecom industry really needs is so-called de-escalation bids such as an increase in tariffs. Instead, the path the industry has chosen is to escalate their commitments. Of course, one can argue that they have little choice but to keep pumping in money to protect their already large investments. But as history has shown, this strategy doesn’t end very well.—Livemint

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