We strongly believe that operators lining up to bid for 3G spectrum will consider that broadband wireless access (BWA) offers a second chance. The immediate requirement is additional spectrum for voice, for which 2G spectrum may soon be available through trading or mergers and acquisitions (M&A) (if the policy changes in the direction recommended by the May spectrum report; this, we believe, will soon be announced, at least by the Telecom Regulatory Authority of India); and intra-circle roaming. These factors should prevent bid values from rising to irrational levels, except perhaps in Delhi and Mumbai.
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Based on our valuation of spectrum on a circle-wise basis, we arrive at a value of about $1.6 billion that a potential operator such as Bharti Airtel Ltd may have to shell out to ensure pan-India 3G coverage. This is the sum of the economic value of the spectrum for the third (or fourth operator by revenue market share) topped by a “desperation premium”. The economic value is derived as per a discounted cash flow (DCF)-based valuation, while “desperation premium” is based on our classification of circles into different categories of bidding intensity.
We believe that Bharti and Vodafone Essar Ltd will pick up spectrum in most circles, shelling out $1.56 billion and $1.4 billion, respectively. The third 3G operator in other key circles will be shared by Reliance Communications Ltd, Idea Cellular Ltd and Tata DOCOMO. Regional operator Aircel Ltd, we believe, will bid aggressively in markets where it has a strong revenue share. Our computation is that inclusive of Bharat Sanchar Nigam Ltd/Mahanagar Telecom Nigam Ltd payments, the aggregate auction proceeds will be about $8 billion, including BWA.
Of the nine bidders who have deposited earnest money corresponding to a pan-India bid, most seem to be gunning for a pan-India spectrum. In our view, Bharti is the most likely operator, perhaps the only one, to get a pan-India spectrum.
We believe that large operators, including Bharti and Vodafone, have seen falling or flat revenues in metro circles, partly because of traffic bottlenecks caused by insufficient spectrum. From the second quarter of FY09 to the second quarter of FY10 (when the tariff wars hadn’t taken off in earnest), Bharti’s gross revenue in metros had fallen by 0.5%, while that of Vodafone had seen a marginal growth of 2.4%. Over the same period, Bharti’s total gross revenue grew 9.6% and Vodafone’s by 12%.
Most operators are still sceptical of the “readiness” for 3G in the Indian market since recent trends suggest a preference for cheaper schemes that may offer lower data rate speeds. Therefore, rolling out services and drawing in better realizations through higher data usage may take 20-24 months. Also, data revenue growth will be more localized with the metros leading the way along with circles such as Punjab, where there is higher spending proclivity on “fun” products.
Over the next five years (after the spectrum auctions end), we are looking at a very fundamental change in the telecom landscape. The other area where we have a different view is the area of leapfrogging. There is no leapfrog in the wireless world. We have to layer the technology that is already there, which we are enabling.