KOLKATA: Bharti Airtel and Idea Cellular are likely to face sustained cash flow challenges through FY16-18 amid pricing pressure, rising capex intensity on data network rollouts and mounting spectrum-linked costs, brokerage Morgan Stanley said. Tepid data growth and an expected surge in “competitive intensity” once Reliance Jio Infocomm launches 4G services commercially later this year is slated to further “limit Bharti Airtel and Idea’s free cash flows”, the US brokerage said, warning that participation in the next spectrum sale around June-July could “worsen the scenario and dent their balance sheets”. “We project a lack of free cash flows for both Bharti and Idea and single-digit ROCE, or `return on capital employed’, amid increasing capex and recurring spectrum payments (for the March 2015 auction), coupled with a Reliance Jio launch overhang,” said analysts at Morgan Stanley in a note to clients seen by ET. The US brokerage expects Bharti Airtel and Idea’s free cash flows (FCF) to “be under pressure over FY16-18, stemming from higher capex intensity, at a time when both telcos are ramping up their 4G play in their bid to take on Mukesh Ambani’s Reliance Jio later this year in what’s likely to be a fierce contest for higher-paying data customers. Morgan Stanley said Reliance Jio’s pan-India (4G) launch later this year “would intensify competition further”. It also noted that the Reliance Jio-Reliance Communications combine, by virtue of their recent pacts to share and trade airwaves in the 800 MHz band, are the sole holders of pan-India sub 1 GHz spectrum, considered ideal for 4G LTE service. Bharti Airtel had reported a 10.6% on-year decline in its consolidated operating free cash flows at Rs 2966.6 crore during the third quarter to December 2015 from Rs 3318.1 crore in the year-ago period, primarily driven by stepped up capex. Idea’s consolidated cash profit, however, during the same period grew nearly 15% on-year to Rs 2551.2 crore from Rs 2221.6 crore in the previous year. Though Idea Cellular generated over Rs 10,000 crore of cash profits in calendar 2015, managing director Himanshu Kapania, in a recent earnings call, cautioned that “it might not be sustainable to deliver 30-plus% cash profits” and added the company hoped to maintain 20%-plus growth levels on this count in subsequent years. Analysts at Morgan Stanley, however, expect interest and amortisation costs linked to spectrum purchases in the March 2015 auction to have a bigger impact on Bharti and Idea’s performance in the fourth quarter of FY16, with both companies recognising such spectrum liability in their books. “The FY16 fourth quarter should see a greater impact of interest and amortisation costs of 900 Mhz spectrum (purchased) in the March 2015 auction, which have started hitting Bharti and Idea’s P&L and will be recognised for the full quarter,” said Morgan Stanley. Small wonder, the US brokerage sees Bharti Airtel’s interest costs increasing by 4% and 2% in FY16 and FY17, respectively. Likewise, it expects Idea’s interest costs to shoot up by 8%, 7% and 3% in FY16, FY17 and FY18, respectively. The US brokerage has also reduced Bharti and Idea’s earnings forecast for the next three fiscals in anticipation of increased spectrum costs and higher capex intensity. For instance, it has cut earnings forecasts for Airtel by 7%, 1% and 5% in FY16, FY17 and FY18, respectively. The brokerage, however, said Idea “is at a higher risk, being a pure wireless play with a relatively small balance sheet, with the reduction in minutes and rising capex”. Accordingly, it has cut the company’s earnings forecast for FY16, FY17 and FY18 by 7%, 13% and 14%, respectively. The latest budget proposal to levy a 15% service tax on spectrum trading deals could also pose interim cash flow challenges for Idea Cellular as it will have to shell out an extra Rs 496 crore to the government if it’s unable to wrap up the purchase of Videocon’s 4G airwaves in UP-West and Gujarat before June 1.