Telecom industry will witness consolidation and Idea-Videocon spectrum trade is first of a series of such deals possible in the sector driven by the recent guidelines on spectrum trading, India Ratings and Research (Ind-Ra) said today.
The rating agency added that trading deals will lead to the rise in debt levels of the acquiring entities.
Idea Cellular has announced purchase of the 4G airwaves in the Uttar Pradesh (West) and Gujarat circle from Videocon Telecommunications for Rs 3,310 crore last week, a deal which indicates that Videocon may be looking at exiting the telecom business.
The availability of spectrum to launch 4G services in a fast growing 4G ecosystem will enable Idea to participate in the anticipated spurt in demand for data
"Similarly, other telecom operators would need to strengthen their spectrum capabilities in order to meet the growth in 4G services and competition from Reliance Jio Limited (R-Jio). Therefore, it is possible that Bharti Airtel and Vodafone India may show interest in purchasing spectrum in the circles remaining with Videocon," Ind-Ra said.
It added in Bihar and UP (East), Airtel may be a potential buyer of Videocon's spectrum as Airtel's current spectrum is in a block of less than 5 MHz and in Haryana, Vodafone may look to buy spectrum for the same reasons.
Videocon has 5 MHz block of spectrum in the 1800 MHz band in four other circles of Bihar, Haryana, Madhya Pradesh and UP (East) post the Idea deal.
The Idea deal will also set a benchmark for pricing the spectrum, as other operators may also look for opportunities to cash out their spectrum holding and retire debt.
Ind-Ra notes that Idea's purchase of the spectrum is at a significant premium to the last auction discovered price of similar spectrum.
The Rs 3,310 crore price paid by Idea is 98 per cent higher than the spectrum prices discovered in March 2015 auction. Idea has gross debt of Rs 23,540 crore as of September 2015.
"The current deal can potentially increase the total debt of the company by over 10 per cent," it added.
In case the other telecom players also tend to acquire spectrum at a substantial premium, the debt levels in such companies could increase further, it added.
It further said heightened competitive intensity will also restrict any meaningful pricing improvement for the telecom sector in the near to medium term.
"At the same time, cash accruals from such investments will be back ended as 4G revenue will gain significance over the next three to five years and therefore could be credit negative in the short term," it added.
Ind-Ra said the telecom sector, which is witnessing increasing competition in the data space is likely to take on additional capex to sustain growth.
The ratings agency said acquisition of spectrum is strategic for Idea, enhancing its 4G capability on the 1800MHz band.
"With the acquisition of this spectrum, Idea will increase its 4G footprint from 10 to 12 circles, which currently contribute around 80 per cent of the total revenues," it said.
Gujarat and UP (West) are important markets for Idea as they together account for more than 11 per cent of its total Indian subscriber base and contributes 15.5 per cent of the company's revenues.
Also, for the quarter ended September 30, 2015, Idea's revenue market share in Gujarat and UP (West) was 25.2 per cent and 35.1 per cent respectively, while the subscriber share was at 13.5 per cent and 14 per cent respectively, it added.
Ind-Ra said Idea faces a credible threat in these circles from Reliance Communications which had acquired spectrum in the 800 MHz band in both these circles in the March 2015 auctions.
"The 800MHz band provides RCom a chance of becoming 4G capable on a superior band and thus potentially providing a better 4G experience than the incumbents thereby challenging their existing market position," Ind-Ra said.