High costs of spectrum likely to be credit negative for telcos: Moody's

High costs of spectrum purchase is likely to impact balance sheets and cash flows of telecom operators in India, according to Moody's Investors Service. 

The Government of India had conducted telecom spectrum auction of 2,354.55 megahertz (Mhz) on October 1 this year which ended on October 7.  

According to PTI report dated October 7, bids worth about Rs 65,789 crore were received at the end of 31 rounds for 965 MHz of spectrum out of total 2,354.55 MHz put for auction.

Moody's in its press release on Friday said that the spectrum auction is credit negative for India's telecom operators as the debt levels of their already stretched balance sheets will rise further. 

"The higher debt levels following the auction and lower profitability from pricing pressure will likely to raise industry-wide leverage," Moody's vice president and senior credit officer Annalisa Di Chiara said in a statement.

The spectrum win in the latest auction will affect the balance sheets of the country's leading telecom players, Moody's said.

"In our view, these spectrum wins will weigh on balance sheets and cash flows, as debt levels will rise materially for most operators, including incumbent Bharti Airtel (Baa3 stable) and larger international groups, such as Vodafone Group Plc," Di Chiara said.

"The operators will experience a reduction in their ability to fund further expansion or to absorb the effects of weaker profitability as competition intensifies," she further added.

Moody's further said that more intense competition in part spurred by Reliance Jio's entry, is likely to drive tariffs lower, causing average revenues per user (ARPU) to contract and industry revenue and profitability to fall over the next 12 to18 months, which means that leverage levels could rise.  

However, the ratings agency has projected that in future the spectrum win will help telecom companies to remain competitive and will increase their cash flows.

"Longer term, the spectrum which the operators secure will help them maintain their competitive positions, support their strategies on data growth and enhance cash flow generation," cited Moody's .