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Bharti Airtel, Reliance have enough cushion for 5G spectrum purchases

This is due to the companies’ deleveraging in the past 12 to 24 months.

Indian telcos Bharti Airtel and Reliance Industries have a sufficient financial cushion to accommodate their purchase of 5G spectrum, following their aggressive deleveraging in the past 12 to 24 months, according to S&P Global Ratings.

In a statement, S&P said the safety net of Bharti Airtel “remains sturdy” as it is built on capital management and tariff hikes. The company’s ratio of funds from operation to debt is around 28% to 30% in Fiscal Year (FY) 2023 which ends on 31 March 2023, after it spent INR431b on the spectrum auction.

S&P said Bharti has received INR100b in fresh equity last year from a rights issue and external investor, and an additional INR158b is expected to come in from residual rights issue instalments through FY24. 

Meanwhile, Reliance has received a cash inflow of INR2.1t through stake sales and equity raising since 2020. This is compared to the INR880b spent on 5G spectrum acquisition.

“We believe RIL's capacity for large acquisitions will be limited while it digests its spectrum purchases, in light of its narrowing buffer. However, the company could monetize additional assets or raise equity to fund an acquisition, if needed,” S&P said.

S&P also said the companies “will not face a material funding need upfront” as they would be able to pay their purchase in 20 instalments annually. This will result in 7.2% interest annually, with the first instalment to be paid upfront.

It added that spectrum liabilities will be added to adjusted debt as these are considered to be debt-like obligations, even if paid via instalments.

“The firms will only see significant returns on their 5G investments in the next five to 10 years. The most meaningful monetization opportunities lie with 5G industrial use cases, but these are still in development,” it said.

S&P added that buying a smaller spectrum will not put Bharti Airtel at a disadvantage in the near term, as Reliance bought the pan-India 700 megahertz (MHz) spectrum which cost around INR400b.

The 700MHz spectrum will be useful to cover rural areas where interference from structures is less of a problem, and indoors which can not be reached by higher band spectrums.

“We believe 5G will be first deployed in limited urban areas due to the more monetizable demographics. Furthermore, we believe Bharti Airtel has flexibility to buy additional sub-gigahertz spectrum, if needed,” it said.

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