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Skyrocketing 3G spectrum prices weaken earnings forecast

Skyrocketing 3G spectrum prices weaken earnings forecast
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First Published: Thu, May 20 2010. 09 53 PM IST

Updated: Thu, May 20 2010. 09 53 PM IST
The government is set to collect Rs67,700 crore (approximately $15 billion) from the auction of the third-generation (3G) licences. While there was no pan-India winner, Bharti Airtel Ltd, India’s largest telecom operator by revenue and subscribers, succeeded in winning the bid in 13 circles for Rs12,300 crore and Vodafone Essar Ltd, India’s second largest telecom company by revenue, was successful in nine circles for Rs11,600 crore.
In our view, Bharti and Vodafone will be routing second-generation (2G) traffic on the 3G network, given 2G spectrum constraints in major circles. On a proforma basis, our FY11 earnings forecast for Bharti would be lower by 3.5% as we were assuming Rs8,000 crore for the 3G licence in our estimates.
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Similarly, our FY11 earnings forecast for Idea Cellular Ltd, an Aditya Birla Group company, would be lower by 11% and that for Anil Ambani-promoted Reliance Communications Ltd (RCom) by 4.5% (forecast 3G outflow of Rs5,000 crore and Rs7,000 crore, respectively).
While we remain cautious on the sector and believe the uncertainty related to pricing of 2G spectrum will remain an overhang, we prefer Bharti over RCom and Idea.
While no pan-India bidder emerged, the competitive intensity will lead to the government collecting Rs67,700 crore including the matching amount to be paid by the state-owned operators, Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd. While the bid amount for Delhi was the highest at Rs3,300 crore, for Mumbai it was a tad lower at Rs3,250 crore.
Bharti bid aggressively in circles where it has a dominant market share. It succeeded in winning in 13 circles, which constitute 69% of its subscriber base and revenues. It won in Delhi, Mumbai, Tamil Nadu, Andhra Pradesh, Karnataka, Rajasthan, Bihar, and a few circles in the C category.
Vodafone won the bid in nine circles (approximately 57% of subscribers and 68% of revenue) and will have to fork out Rs11,600 crore. It focused primarily on metros and category A circles.
It is interesting to note that barring Delhi, Mumbai, and Tamil Nadu among major circles, there is no overlap between Vodafone and Bharti.
RCom will compete alongside Bharti and Vodafone in Delhi and Mumbai. It is interesting to note that RCom has not won in any of the A circles, which together constitute approx 33% of India’s subscriber base. Also, the company’s winning bid in circles covers only about 49% of its own subscriber base.
Idea seemed the most determined as it won in 11 circles, covering 77% of its subscriber base, the highest for any incumbent operator. In return, it will pay a hefty price of Rs5,770 crore.
Aircel Ltd was the surprise in the pack with its Rs6,500 crore bid for 13 circles. It even won the bid in Punjab, where it has no customers.
We believe the company may possibly consider partnering with a foreign firm in the future and, hence, bid aggressively covering 90% of its subscriber base.
The aggressive bidding by operators for 3G licences has led to higher-than-forecast licence fee outgo.
Graphic by Yogesh Kumar/Mint
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First Published: Thu, May 20 2010. 09 53 PM IST