Telcos may have to raise Rs 50,000 cr to fund 3G rollout

In what could be one of the largest debt-raising exercises within a sector, telecom companies that win the third generation (3G) licences are expected to raise more than Rs 50,000 crore (Rs 500 billion) by way of debt in order to roll out their services.

The money constitutes nearly 26 per cent of the total domestic borrowing of the Indian corporate sector in 2008-09. Last year, Indian companies had also raised $7.9 billion through external commercial borrowings.

The bidding for the four pan-India 3G slots has been hitting record highs, and companies are expected to pay over Rs 60,000 crore (Rs 600 billion) to the government for the spectrum within 15 days of winning the bid.

Telcos say, assuming they have to fork out an additional Rs 5,000 crore (Rs 50 billion) each for the roll-out, the cost of 3G would come to Rs 80,000 crore (Rs 800 billion).

Analysts as well as telecom operators say anything between 60 per cent and 70 per cent of this money (Rs 48,000-56,000 crore (Rs 480-560 billion) would have to be raised through debt.

"There is no doubt that telecom is going to be one of the biggest borrowers this year," said Abhishek Sawant, telecom analyst at Indusview Advisors, a Mumbai-based research company. "FMCG (fast-moving consumer goods), aviation and information technology are expected to do overseas acquisitions this year. But their capex and targets are nowhere close to that of the telecom sector."

The highway sector has prepared a blue print which will require investments of over $20 billion, but this money will be raised over some years.

The National Highways Authority of India has recently said it needed to borrow up to Rs 33,000 crore (Rs 330 billion) over the next three years to implement various road projects.

Telecom companies are already gearing up to raise the funds. Tata Teleservices, for instance, has received board approval to raise more than Rs 8,500 crore (Rs 85 billion) for the 3G auction. Banking sources said Bharti is going to raise over Rs 7,500 crore (Rs 75 billion) though a combination of domestic debt and ECBs.

Aware of the need, the government has increased the cap on ECBs to $40 billion from $35 billion for 2010-11. It has also permitted telecom companies to raise short-term loans from the domestic market, which can be refinanced with ECBs in 12 months.

This has been allowed as telcos which would require to pay the entire auction money in 15 days won't be able to take advantage of the lower rates of international debt by closing deals so quickly.

Analysts as well as telcos agree that the interest burden will be large to dent bottomlines for at least a few years. Even assuming that most of the money comes from ECBs at an interest rate of 6 per cent to 7 per cent, as compared with 9 per cent to 11 per cent from the domestic market, the telcos would have to pay out Rs 3,000 crore (Rs 30 billion) to Rs 3,500 crore (Rs 35 billion) as interest cost annually.

"The interest cost will be very huge. Even if we take a minimum interest rate, each company has to fork out Rs 900 crore (Rs 9 billion) every year as interest," said Sanjay Chawla, analyst, Anand Rathi Securities. "But, I am sure, as they generate cash through operations, they might keep retiring debt, which might come down to Rs 600-700 crore (Rs 6-7 billion)."

A director in a leading telecom company, which has bid for licence, said: "Two-thirds of our financing will be through debt. Of course, it will have a dent on our profitability and we don't see us breaking even on 3G in the next three to five years."

Others said the companies might go in for raising money through equity to reduce their debt on the books.