3G investments unlikely to impact telecom operators' credit profiles : CRISIL

The auction process for the award of 3G spectrum blocks, which begins today is an important development for the telecom sector, and has the potential to redefine the industry.

Though success in the auction will enable telecom operators to offer value-added data and video services in future, rating agency CRISIL does not expect players' revenues from these services to grow substantially over the next two years.

Nevertheless, over the near term, availability of the 3G spectrum will ease the constraints on the 2G spectrum to the voice services of telecom service providers and according to CRISIL, this will help telecom operators that succeed in the auction to improve the quality of their services, while maintaining strong subscriber volume growth in their existing voice services.

This will, therefore, affect their business risk profiles positively, by enhancing the retention of high-value customers and improving the players' competitiveness in an industry where competition has intensified and where churn rates are expected to increase with the implementation of mobile number portability.

The rating agency believes that telecom operators will, therefore, participate in the bidding process while considering the potential positive benefits in defending their existing market positions as well as their long-term ability to offer value-added services.

Since the 3G spectrum slots are limited and the market positions of players vary across telecom circles, the bidding strategy will be circle-specific.

The rating agency said in a statement, "Further, the expected pick-up in 3G services will also be different across circles. CRISIL-rated telecom majors are expected to bid aggressively for spectrum blocks for the circles in which they hold leading positions."

However, these players are unlikely to display such aggressiveness for all the circles for which the bidding is taking place, bringing a degree of moderation to the final bidding amount, it added.

All the same, the credit risk profiles of CRISIL-rated telecom operators are expected to remain unaffected. "This is because the business risk profiles of these players will improve if they obtain 3G spectrum blocks for their key circles," it said.

Also, the incremental expenditure incurred by the players towards procuring 3G spectrum blocks is likely to be manageable, given the large capital expenditure programmes already being executed by these telecom operators to expand their geographical presence.

Large debt funding of the additional investment on 3G spectrum licenses may, however, exert pressure on the financial risk profiles of CRISIL-rated players over the near to medium term.

The pressure on the players' financial risk profiles will be offset by their strong cash flows, underpinned by a mature pan-Indian presence for most rated players or support from their parents.

On the other hand, if the amounts bid by the CRISIL-rated telecom service providers in the auction for 3G spectrum licences exceed CRISIL's expectations and if these large investments are funded primarily through debt, the credit risk profiles of the players may come under pressure.

CRISIL will closely monitor the outcome of the bidding process and its impact on the ratings of entities in the telecom services sector. CRISIL rated telecom companies and their current outstanding ratings are listed in the table below: