Reliance Jio launch may disrupt spectrum auction: govt official4 min read . Updated: 16 Sep 2016, 07:52 AM IST
With excessive spectrum on offer, Reliance Jio's launch may hamper spectrum auction as telecom firms already have over-leveraged balance sheets
New Delhi: The government may have to look at another round of spectrum auction in case the one starting on 1 October fails to draw enough bids.
What could hurt the prospects of a successful completion of the current auction is the excessive amount of spectrum on offer, the high price of the 700 Mhz band as well as the aggressive launch of Mukesh Ambani-promoted Reliance Jio Infocomm Ltd putting pressure on existing telcos who already have over-leveraged balance sheets, a government official said on condition of anonymity.
The total spectrum on offer “is four times the holding of Reliance Jio and three times the present holding of (Bharti) Airtel. This is the kind of spectrum we are putting up so we don’t expect all of it to be sold," the government official said.
“The other (fact) is that since pricing and revenues are under pressure in the industry because of the Reliance Jio launch, some of them might want to preserve cash to be able to compete. So that might have a downward effect," the official added.
The official declined to comment on whether the government is already thinking of the next round of auctions.
In the Union budget, finance minister Arun Jaitley estimated a revenue of ₹ 98,995 crore from communication services for the year ending 31 March. The amount includes proceeds from spectrum auction and other fees levied by the telecom department.
In the October auction, the government is offering 2,354.55 megahertz (MHz) of spectrum worth ₹ 5.63 trillion at the minimum or reserve price. Reserve prices that both telcos and analysts said were set too high by the government had sparked concern that response to the auction would be muted.
Already, analysts and rating agencies have expressed concerns about the aggressive entry of Reliance Jio into the market and have predicted that it will put the balance sheets of incumbents under further pressure.
Most of them have estimated average operating Ebitda (earnings before interest, tax, depreciation and amortisation) margin of the top telecom companies to narrow by at least 200-250 basis points in the next year. Fitch ratings in a report on 6 September has said that Jio’s entry will be “credit negative" for incumbents in the telecom space and will also speed up consolidation. The report said smaller telcos are likely to be impacted most and only a handful will emerge out of the shakedown. It predicted an increase in pressure on tariffs at a time when capital expenditure for incumbents is bound to increase with the upcoming spectrum auction.
On 1 September, Reliance Industries Ltd chairman Mukesh Ambani announced the acquisition of 100 million customers as the company’s target by March 2017. Jio’s tariff plans range from ₹ 149 to ₹ 4,999 per month, with as much as 75GB data included in the top plan. Jio also offers free domestic voice calls to any network across the country with no charge or deduction of data even after 1 January 2017.
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The government official cited above said that in addition to the 700 Mhz, which is perceived as being expensive, there is ₹ 1.5 trillion worth of other spectrum, where there should be active bidding.
“The main headline of this auction would be that this would once and for all end the spectrum scarcity in the telecom sector. We expect revenues as well, all auctions are about revenues," the official cited above said.
“I can see that there are gaps in the spectrum of some of them and they need to bid if they are to remain in the market. And they appear to be keen, as in there are players who are keen to stay in the market so that should improve the demand," the official added.
The 700MHz band, which is the most expensive and most effective, is likely to generate less interest from telecom service providers.
The base price for the 700 MHz has been fixed at ₹ 11,485 crore for 1 MHz, making the bidder liable to pay ₹ 57,425 crore for 5 MHz on a pan-India basis.
However, India’s top telecom companies have signalled their intent to participate in the upcoming spectrum auction, belying concerns that high prices would deter them. Only Norwegian firm Telenor ASA did not apply to bid in the auction, billed as India’s largest sale of spectrum, before the deadline for telcos to submit their applications lapsed on Wednesday.
Bharti Airtel, Vodafone India Ltd and Idea Cellular Ltd— India’s biggest telcos—and new entrant Reliance Jio Infocomm Ltd, or Jio, will participate in the auction. Aircel Ltd and Reliance Communications Ltd, which announced their merger on Wednesday, sent in separate applications. Tata Teleservices Ltd will also bid.
The last date for withdrawal of applications is 22 September for operators.