Wednesday May 19, 2010
BEHIND THE NEWS
By RISEN JAYASEELAN
risen@thestar.com.my
PETALING JAYA: As the bidding for 3G licences reaches dizzying heights in India - a nationwide 3G spectrum is now going for US$3.54bil (RM11.4bil), according to latest reports - concerns again have arisen about how this will impact Axiata Group Bhd.
Axiata owns about 20% in India's Idea Cellular Ltd and some analysts have raised concerns about how Idea is going to afford its 3G bids.
CIMB Research, for example, has said in a recent report that “the risk of a cash call by Idea is rising given the rocketing bids for 3G spectrum.”
ECM Libra estimates that it could cost Idea more than RM4bil to acquire 3G spectrum in the nine circles in India where it has a significant market share.
Axiata, in an email reply to StarBiz, said that Idea had already communicated to the market that winning a nationwide 3G licence was not its priority. “Idea will focus on selective circles where they have a market leading position,” Axiata said.
It added that Idea would be able to fund its 3G ambitions by itself, thereby ruling out the likelihood of a cash call (by Idea).
Axiata also said it could not comment on exactly how much Idea would be paying for the 3G spectrum as “the Government of India hasn't announced the winners of the 3G auction.”
Idea's cash balance in the fourth quarter of financial year 2010 stood at around RM1bil.
ECM Libra writes that Idea, with a gross debt to equity ratio at 0.68 time, could leverage up to a ratio of one time, thereby raising an additional RM2.6bil.
But the research house reckons that this could still be insufficient to finance the acquisition of 3G spectrum for the nine circles. “On top of this, there is still the additional 3G network roll-out capital expenditure to take care of which has not been factored in,” it said.
ECM Libra also reckons that given Axiata's 20% stake in Idea, Axiata would need to fork out RM1.26bil in cash to finance its share of Idea's acquisition of the 3G spectrum.
“We believe that Axiata should have no financing issues, should such a cash call by Idea occur, given its (Axiata's) recent equity stake disposal in XL Axiata which has raised approximately RM2bil.
“Nevertheless, we acknowledge that overpaying for the spectrum may not represent an efficient use of cash and this may result in some resistance to Axiata's share price performance,” ECM Libra wrote.
Besides 3G, there are other concerns about Idea.
For its financial year ended March 31, 2010, Idea's net profit came in below some analysts' expectations as this was due to lower-than-expected EBITDA (earnings before interest, tax, depreciation and amortisation) margins.
Idea's EBITDA margins had contracted slightly by 60 basis points year-on-year to 27.4% in FY10.
Analysts had put this down to “hyper-competition” and price wars in the Indian market.
However, Axiata said that aside from competition, Idea's start-up costs for the nine circles also had an impact on margins.
Yet another concern with the Indian market is that the telecommunications regulator there recently stated it was going to ask for a one-time additional fee on incumbent mobile operators holding 2G spectrum beyond 6.2Mhz and that this fee will be based on 3G prices.
ECM Libra is predicting that Idea could be hit in the region of between RM600mil and RM1.9bil for this fee.
CIMB Research said in a note yesterday that it took a “dim view of India's latest regulatory proposals for the telco sector as we believe it will hurt the incumbents more than newcomers.”
However, it added that the proposal would have a smaller impact on Axiata as Idea contributed 4% to Axiata's FY10 core net profit and sum-of-parts value.
ECM Libra also reckons that given the high cost of the 3G spectrum in India, Axiata is unlikely to declare any special dividends in FY10.
The research house said Axiata would “more likely begin with modest dividend payouts in FY11.”
“Axiata's cash and bank balance may have grown to RM4bil in Q1 FY10, but due to the likelihood of a cash call by Idea, we believe Axiata may take a more prudent approach and preserve cash,” ECM Libra said.
Axiata, however, said it had always communicated to the market that it would be in a good position to consider dividends in 2011.
Any decision on dividends was not dependent on developments relating to 3G in India, it added.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/19/business/6290075&sec=business
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