Vodafone share price: Indian spectrum auction may prompt credit downgrades

Vodafone Group Plc’s (LON:VOD) £2.8-billion investment in Indian spectrum (essentially the purchase on bandwidth)could put the company’s credit ratings at risk, a Bloomberg News report suggested today.

Last month, Vodafone’s India paid £2.8 billion to acquire airwaves in 12 of the country’s telecoms regions. While important for Vodafone’s expansion in one of its key markets, the investment also adds to the pressure on cash resources following the company’s major acquisitions in Europe and a broader refurbishment and expansion program known as Project Spring. Moody’s Investors Service described the India spectrum price tag “a credit negative”, while Finch Ratings commented that “headroom” had been reduced.
“If you add it to other auctions due to come, it raises the possibility of downgrades to a very high probability,”Bloomberg quoted Roger Appleyard, a RBC Capital Markets analyst, as saying.
According to RBC, Vodafone’s net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) will be 2.2 percent for the fiscal year ended last month, which is similar to company’s peers. However, RBC expects that the ratio will increase to 2.6 next year, with continued investment in Project Spring and auctions in Germany and Turkey taking their toll.
Currently Moody’s has Vodafone rated at the third- best investment grade, A3, and Fitch gives the telecoms giant a rating of BBB+while both Fitch and Moody’s consider the company to have a stable outlook. The two rating agencies issued downgrades on Vodafone last year, after it agreed to acquire Spanish cable company Grupo Corporativo Ono SA and Germany’s Kabel Deutschland Holding AG for €7.2 billion and €7.7 billion, respectively.
The high price that Vodafone paid for the Indian spectrum underscores how important that particular market is for the UK company. The market is a bright spot for the group, accounting for about 10 percent of its annual revenue. The importance of India was acknowledged by Ivan Palacios, Moody’s credit officer, who said in a note that retaining spectrum in the country had been “key for Vodafone”.
In today’s trading, Vodafone shares were up 1.2 percent at 224.77p, as of 10:30 BST. The stock has gained 0.9 percent since the start of the year. The company’s market capitalisation currently stands at £59.2 billion.
As of 14:29 BST, Tuesday, 07 April, Vodafone Group plc share price is 225.10p.