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Indian telcos’ cash flow growth to fund 5G outflows, Fitch

The growth in the operating cash flows of Bharti Airtel Limited (BBB-/Stable) and Reliance Jio is likely to be sufficient to pay for their 5G spectrum assets and related capex, says Fitch Ratings.

The telcos acquired spectrum at an auction that concluded on 1 August, which was by far the largest ever in India by the amount of spectrum sold and proceeds raised. About USD19 billion of spectrum in bandwidths ranging from 700MHz to 26GHz was sold. The spectrum assets have a life of 20 years, and telcos need to pay spectrum dues in 20 equal annual instalments at an interest rate of 7%. Jio, Bharti and Vodafone Idea will pay USD1 billion, USD500 million and USD200 million per annum (including the interest component), respectively, for the spectrum purchases.

Fitch expects that the credit profiles of Bharti and Jio, a subsidiary of Reliance Industries Ltd (Long-Term Foreign-Currency Issuer Default Rating: BBB/Stable), will remain intact as their balance sheets have been strengthened by large equity raisings in the last three years. We expect that Bharti’s net debt/EBITDA for financial year ending March 2023 (FY23) will be 1.5x-1.6x, well below the 2.5x level above which Fitch may consider negative rating action.

We expect Bharti’s and Jio’s free cash flow generation to improve as operating cash flow growth will more than offset incremental spectrum-related payments and the increase in 5G-related capex. We believe that 5G capex in 2023-2024 will replace current 4G capex, as 4G coverage is largely complete. Telcos will also continue to strengthen their fibre infrastructure by connecting towers with fibre and backhaul infrastructure to prepare for the launch of 5G services.

The telcos’ operating cash flows will likely improve on higher monthly average revenue per user (ARPU). We expect industry monthly ARPU (USD2) to grow by 15%-25% in the next 12-18 months, as telcos will likely increase headline tariffs in the next 12 months. We expect ARPUs to continue to increase in the medium term, as telcos will likely price 5G services higher than 4G. ARPUs will also grow as 2G and 3G users gradually migrate to higher-priced 4G and potential 5G plans. We forecast telcos’ EBITDA margin to expand by 200-300bp as telcos will realise cost savings on lower spectrum usage charges, given they will not have to pay usage charges on the spectrum bought in the latest auction.

However, the 5G business case will only gradually evolve with limited cash flow contribution in the initial years. Telcos’ will likely focus on 5G use case for enterprises initially to accelerate revenue growth in this segment.

We believe the industry will continue to consolidate with Jio and Bharti together garnering 80%-85% (March 2022: 78%) of the revenue of private telcos during 2023-2024. Jio’s and Bharti’s network positions will pull ahead of Vodafone Idea as they have larger sub-1GHz spectrum and about three times Vodafone Idea’s high frequency 5G spectrum. Sub-1GHz spectrum has better propagation qualities than higher-frequency spectrum.

Jio was the largest spender in the latest auction, buying USD11 billion worth of spectrum, followed by Bharti at USD5.4 billion and third-largest Vodafone Idea, only buying USD2.5 billion. Bharti and Jio acquired pan-India 5G spectrum assets in 3.3GHz and spectrum in the 26GHz range. They also topped up their existing 4G spectrum holdings by acquiring spectrum in 900MHz, 1800MHz and 2,100MHz. Jio was the only one that acquired 700MHz spectrum, which will likely improve indoor and rural coverage. Vodafone Idea acquired 850 MHz of spectrum in 3.3 GHz compared to 2,200MHz by Bharti and 2,440 MHz by Jio. FitchRatings

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