4G Might Lead Telcos Into Debt Trap

The deployment of any new technology demands significant investment and -- in that respect -- 4G is no different.

Usually, however, this spending is spread over a considerable period of time, giving an operator chance to recover a part of its investment as deployment gathers momentum.

That is clearly not the case where 4G deployment in India is concerned. With new entrant Reliance Jio preparing to launch 4G services in March 2016, existing mobile operators are being forced to increase their spending to defend their turf.

Bharti Airtel Ltd. (Mumbai: BHARTIARTL), India's largest service provider, recently announced plans to spend about $9 billion over the next three years on transforming its networks. Idea Cellular Ltd. , the number-three mobile operator, is also upping expenditure on network modernization and the launch of 4G services. It recently acquired 1800MHz spectrum from Videocon Telecommunications Ltd. , a smaller rival, in the two circles of Uttar Pradesh (West) and Gujarat. (See Bharti's $9B Network Splurge in India.)

"The recent M&A or spectrum trading activity is definitely driven by telcos' 4G gameplan," says Deepak Kumar, the founder analyst at BusinessandMarket, a research group. "These developments will act as a catalyst for 4G deployment in India."

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But while the big mobile players are pumping more funds into their networks, any sign of a return on investment is proving elusive. India already has some of the lowest telecom tariffs in the world and the forthcoming launch of services by RJio could put further pressure on these prices.

Operators have also spent a huge amount this year on acquiring new frequency licenses. Following changes to rules on spectrum sharing and trading, bigger players are racing to buy spectrum from smaller competitors such as Tata DoCoMo, Aircel Ltd. and Videocon.

The risk now is that spending drives operators into a debt trap. Idea Cellular had a gross debt of 235.4 billion Indian rupees ($3.5 billion) as of September 2015, and its latest deal with Videocon could increase this by as much as 10%, according to a recent report from India Ratings and Research.

That deal could also have set a new benchmark for spectrum pricing, according to India Ratings and Research. At a price of INR33.1 billion ($495 million), the spectrum cost 98% more than it would have during the March 2015 auctions. If future transactions are this expensive, conditions for the operators will be even tougher.

Operators may have to take some drastic steps accordingly. There is now speculation, for instance, that Bharti Airtel could look to exit a few of its markets in Africa to fund network modernization in India. It recently acquired Augere Wireless, which had broadband wireless access spectrum in two circles, and is also believed to be in a race to acquire Videocon's remaining spectrum in the three circles of Bihar, Uttar Pradesh (East) and Madhya Pradesh. (See Bharti Airtel: Out of Africa?)

— Gagandeep Kaur, contributing editor, special to Light Reading

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