Brokerage houses have been upgrading telecom stocks post the recently concluded spectrum auctions. However, Moody's is not in any hurry to do the same.
In an interview to CNBC-TV18, Laura Acres, associate managing director, Moody's says the high bidding prices mean a significant surge in company debt and costs.
Hence, despite a number of positives in sector incumbent Bharti Airtel , the brokerage firm is unwilling to upgrade the stock just yet.
"The company's debt to EBITDA ratio is at 3x and that is high. Also, with its 12- year repayment method, the capital will be considered debt until it is paid back," she further adds.
India's biggest telecom spectrum auction concluded on March 25 and raised USD 17.7 billion. Bharti Airtel, Vodafone and Idea Cellular committed for USD 4.7 billion, USD 4.2 billion and USD 4.9 billion worth of bids in the auction, respectively.
Below is the transcript of Laura Acres's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Ekta: Overall can you tell us what your analysis is with regards to the spectrum auction payout that the likes of Bharti as well as Reliance Communication, Idea have and what impact does it have in terms of the credit rating for the sector as well as maybe individual companies?
A: Before I get into the midst of your question, what I would like to do is actually just take a step back and let us just think about the broader implications of the auctions. Obviously we had 19 days of bidding, we had 115 rounds, we ended up with record pricing. So, in total, we saw some USD 17.5 billion raised. This compares to the reserve price of USD 12.9 billion, so some 35 percent premium there. And that obviously is going to have implications right across the sector. And if I were to rule this down and think about individual companies that we rate, Bharti Airtel, they had some USD 4.5 billion in total fee in total spectrum fees.
They have an upfront payment of approximately USD 1.2 billion which will go out over the next 10-12 days. And if we think about that company from a cash flow perspective the up front payment can be paid out of existing cash in cash flow and even because of the deferred payment mechanism, we would certainly expect the ultimate payments to come out to be in line with the company's cash flow generation. So, ultimately, there should not be any increase in debt. There should be no incremental increase in debt simply as a result of the auction. Having said that though, the debt payment or the liability is actually going to be recognised as debt and as a result that leverage will increase for each of the telecommunication companies (telcos) that we rate. But again, in the Bharti context, we expect that this to be manageable in the context of their rating.
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