BackSpectrum auction redraws India’s telecom landscape
The 10-day auction of airwaves ended with India attracting bids for `61,126 crore, of which `18,296 crore will be garnered this fiscal year
Premium
New Delhi/Singapore: The spectrum auction that concluded on 13 February not only raised much needed funds for the government, but also set the stage for a redrawing of the competitive landscape in India’s telecom industry.
The 10-day auction of airwaves, India’s fourth, ended with the government attracting bids for ₹ 61,126 crore, of which it will garner ₹ 18,296 crore in the fiscal year ending 31 March.
The United Progressive Alliance (UPA) government, which will head into a tough electoral battle this year, was successful in selling almost 80% of the more than 400 units of airwaves in the 1,800MHz band for ₹ 37,537 crore, across the country, and all the 46MHz of 900MHz in the three metro markets of Delhi, Mumbai and Kolkata, for ₹ 23,589 crore.
Telecom companies will pay 25% and 33% of the bid amount upfront in the 900MHz band and 1,800MHz band, respectively, and the rest in 10 annual instalments after a two-year moratorium.
The three largest operators by market share—Bharti Airtel Ltd, Vodafone India Services Pvt. Ltd and Idea Cellular Ltd—together will pay almost 80% of the total money raised by the government. Some ₹ 11,054 crore will be spent by Mukesh Ambani’s Reliance Jio Infocomm Ltd, the dark horse before the auction began. The company acquired airwaves in the 1,800MHz band in 14 regions.
The remaining 3% of the money will come from Telewings Communications Pvt. Ltd, the local unit of Norway’s Telenor ASA, which bagged additional airwaves in its six existing areas of operations and added Assam. Reliance Communications Ltd and Aircel Ltd also won some spectrum.
The bulk of the money is being paid to acquire 1,800MHz spectrum. Currently, this frequency is being used by telcos to provide 2G services— vanilla voice and basic data services.
The auction behaviour by the three leading incumbents—Bharti, Vodafone and Idea—indicates a strategy shift as they seek to counter Reliance Jio’s upcoming fourth-generation (4G) or Long Term Evolution (LTE) services launch by offering high-end data services on the 1,800MHz frequencies, as well as ensure they have spectrum to continue their business as the existing holdings start expiring.
Reliance Jio’s pan-India 4G bandwidth, which it acquired in 2010 for ₹ 12,800 crore, is in the 2300MHz frequency band, and this technology platform, called the TD (Time Division)-LTE standard, is yet to see a global take-off.
Bharti, Vodafone and Idea acquired bandwidth in the 1,800MHz in 15, 11 and 11 circles, or telecom zones, which account for 72%, 65%, 74% of their revenues, respectively, and all three have announced plans to use this spectrum to launch 4G services, using the FD (frequency division) LTE technology.
Videocon and Telenor, too, have said they plan to roll out 4G services in the 1,800MHz band, using the spectrum they acquired in a November 2012 auction.
“We believe that acquisition of 1,800MHz spectrum is a good way to future-proof the business as it is the favoured LTE band globally. All major operators have strengthened their 1,800MHz spectrum holding in their dominant service areas keeping the strategy of LTE on 1,800MHz in mind," Singapore-based Suresh A Mahadevan and Varun Ahuja, telecoms analyst with UBS Securities Pte. Ltd, wrote in a 14 February report.
The strategy shift by the incumbents further reveals that operators are betting on high-speed data services to be the future growth driver.
India ended November 2013 with 881.13 million mobile connections, of which more than 85% are considered active subscribers, according to the latest data from the Telecom Regulatory Authority of India (Trai).
Many analysts also share the view that the three leading incumbents emerged stronger from the auction after securing 67% of the 1,800MHz spectrum that was sold, as this move hastens industry consolidation and reduces their dependence on the 900MHz band when their permits, outside the metros, come up for renewal beginning next year.
“Reliance Jio’s acquisition of an average 6MHz in the 1,800-band across 14 circles is not materially higher versus individual wins of incumbents— hence, unlikely to drive material change in competitive position, and (post this auction), only six out of 22 circles are left with more than 5MHz of unsold 1,800MHz spectrum; so path for new competition looks challenging from here on," Bank of America Merrill Lynch’s Reena Verma Bhasin wrote, listing the reasons why the “auction outcome was positive for incumbents", in a 14 February note to clients.
The participation of Reliance Jio was most keenly watched by the industry with many expecting the telco to bid for 1,800MHz spectrum, while sending the price of the 900MHz spectrum higher to force excessive payouts by the incumbent telcos that needed the radiowaves most.
However, the fact that the telco was able to get 1,800MHz spectrum in 14 circles along with the other operators has got many analysts to believe that Reliance Jio’s entry may not disrupt the sector as much as earlier expected despite the fact that these 14 regions account for 71% of the industry’s revenue.
“...the Reliance Jio roll-out will depend a lot on how fast the ecosystem progresses on mass market, low cost, multi-mode chipsets/handsets," Rajiv Sharma, an analyst with HSBC Securities and Capital Markets (India) Pvt. Ltd, wrote in a 14 February report.
Despite its strong balance sheet, most experts say that the telco’s entry is unlikely to result in an hyper-competitive environment as witnessed in the past, as the discounting strategy had failed to help previous challengers. Considering the data arsenal of incumbents, Reliance Jio may also find it difficult to make inroads into the metros and category A telecom operating zones.
Reliance Jio has Deutsche Telekom AG as an adviser for its 4G services and signed up with partners (including Reliance Communications) and vendors (including Samsung Electronics Co.) for towers and equipment, including handsets, to start rolling out its services later this year.
Not all analysts believe that the company will use the airwaves it won in the recent sale only to complement its 4G offerings in the pan-India spectrum (2300MHz) it already holds.
Credit Suisse analysts Sunil Tirumalai and Chunky Shah are of the view that Reliance Jio’s recently acquired airwaves in the 1,800MHz band are insufficient for 4G roll-outs, but would be adequate for offering traditional voice services, thereby posing a credible threat to incumbents.
Deutsche Bank Market Research analysts Srinivas Rao and Amyn Pirani say that in the short run, Reliance Jio could utilize the 1,800MHz spectrum to roll out voice services as a complement to its expected TD LTE data offering in the 2.3GHz band.
A key reason for the success of this auction was the impending expiry of 900MHz spectrum rights for incumbent operators such as Bharti Airtel and Vodafone in key metros, in November, forcing them to renew their licences for the next 20 years.
Bharti and Vodafone were able to secure 900MHz spectrum in metro service areas and the competitive outcome of their bidding resulted in the bid prices in the three metros—Delhi, Mumbai and Kolkata—finish at 105.8%, 71.1% and 55.7%, respectively, above the base price.
The aggressive bidding by incumbents also saw Bharti and Idea grabbing airwaves in the 900MHz in Mumbai and Delhi respectively, where they previously did not have this bandwidth.
The incumbents also have to face the 900MHz auction in non-metro markets within the next 12-18 months as their mobile permits expire in these circles. While each of these operators have tried to protect their non-metro markets by bagging additional airwaves in the 1,800MHz, in the just concluded sale, they may still have to make huge payouts to fortify their holdings in the 900MHz frequencies. The future of the sector is heavily dependent now on the next auction.
Idea Cellular will likely be most vulnerable as seven of its crucial permits, including for Gujarat, Maharashtra, Haryana and Kerala, are coming up for renewal in December 2015. Deutsche Bank has predicted that Idea will need about ₹ 18,807 core to renew its 900MHz holdings in non-metros, when compared with ₹ 7,820 crore for Bharti and ₹ 11,757 crore for Vodafone.
“We believe Idea’s bids reflect the cashflow constraints it faces relative to its peers and the need to conserve cash for the next round of auctions for 900Mhz spectrum in its legacy markets," Deutsche Bank Market Research analysts wrote.
At the same time, costlier permit renewals will also ensure that smaller operators, as in the case of Loop Mobile in the current auction, choose to exit the sector, hastening the pace of consolidation in favour of the bigger telcos with stronger balance sheets. On 18 February, Bharti announced that it would acquire Khaitan family-owned Loop Mobile for an undisclosed sum. Senior officials requesting anonymity said the transaction would be valued at around ₹ 700 crore, including ₹ 400 crore of debt the Mumbai operator had on its books.
The key concern before the auction was the debt position of the industry, especially the participating telcos. As per the telecom regulator, the industry debt is around ₹ 2.5 trillion on revenues of around ₹ 1.5 trillion.
This debt is mainly due to the debilitating tariff war of 2009 and the huge payouts after the 3G and broadband wireless access (BWA) auction in 2010. At the end of the third quarter of the current fiscal, Bharti had a net debt of $9.2 billion, Vodafone of almost $5 billion and Idea of almost $2 billion. The net debt to Ebitda (earnings before interest, taxation, depreciation and amortization) was around 2-3 times.
Using the auction-discovered prices as a benchmark, the expected total spectrum payouts to the government over the next three years would be $18 billion—compared with industry revenue of $25 billion. In accounting terms, the entire spectrum payout should be treated as debt by the bidders (even if the deferred payment route is opted for). Incremental revenue from the spectrum purchased may take time to realize (and in case of licence renewals, there may not be any incremental revenue)—leading to a significant drop in industry’s return metrics in the near term.
Most likely, all the bidders will pay for the spectrum using debt. But this may be expensive, especially after many banks started distancing themselves after the February 2012 Supreme Court judgement that cancelled 122 licences allocated to nine companies. This cancellation left the banks with thousands of crore in bad debt. This time around, however, the government has allowed trading of spectrum, which means that telcos can also sell airwaves to raise money.
Also, a number of the operators went out to raise money and reduce their existing debt before the auction began. Bharti, for instance, raised as much as $2.5 billion from the US and Europe markets through bond sales.
Experts are divided over the impact of the auctions on tariffs. While many agree that the tariffs were already on their way up as pricing power had returned to the telcos, the increased payouts in terms of spectrum fees and bid amounts could mean tariffs end up higher than earlier estimated.
“We firmly believe that Indian mobile voice pricing will continue to inch up for the foreseeable future and Bharti Airtel and Idea will emerge as key beneficiaries," UBS analyst wrote in their report—a view echoed by other analysts as well.
“We estimate that recent auction outgo creates pressure for around 1.5-2.5 paisa (4-7%) improvement in voice-rpm (revenue per minute)," Bhasin wrote in her report.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
