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Telcos are likely to pick up 5G airwaves at the reserve price and may not bid aggressively considering that surplus spectrum has been made available, brokerages tracking the auctions said.

Bharti Airtel and Reliance Jio are likely to purchase pan-India spectrum, while Vodafone Idea may bid for only a few circles considering its weak financial position, they said. However, the Centre’s decision to allow captive 5G networks to buy airwaves is a key concern for telcos.

“More than adequate spectrum is available for the three operators, and hence we don’t expect a bidding war," said analysts at JP Morgan in a note to clients on Thursday. In the 3300-3650MHz spectrum band, 330MHz of airwaves has been made available for every circle, according to the notice inviting applications issued by the department of telecommunications. An operator requires 100MHz for a pan-India rollout.

“We note that despite reserving 40MHz in the 3,300MHz band for public sector telcos, there is adequate spectrum for the three operators, as the spectrum cap is set at 40% (or 130MHz), which would limit the scope for aggressive bidding in our view," analysts at Nomura Global Markets Research had said in a note a day after the government said that 5G auctions will begin on 26 July.

Sector watchers questioned the participation of Vodafone Idea, given its stretched balance sheet and its inability to raise funds but said Bharti Airtel and Reliance Jio were likely to participate with an estimated annual payment of 2,840 crore, including interest, for pan-India 5G spectrum. “Despite no upfront payment requirements, we remain sceptical of Vodafone Idea’s ability to meaningfully participate in the auctions as it would require immediate servicing (unlike about 3.5 years of moratorium on the entire existing spectrum debt), which would be difficult given its stretched balance sheet and elusive equity fundraising," said analysts at Credit Suisse in a note to clients.

“We believe Vi could restrict its bid for 5G spectrum to select circles, given its capex constraints, much-delayed fundraising and existing gaps in 4G coverage," analysts at Nomura noted.

The Swiss brokerage house said in the note that while Airtel and Reliance Jio were well-positioned to participate in the 5G auctions, Airtel remains the key beneficiary of the average revenue per user (Arpu) improvement, improved regulatory environment, and organic market share gains. Another upside will come from the scrapping of spectrum usage charges, which will significantly reduce the acquisition cost of fresh spectrum.

“We expect Bharti and Jio to participate in the auctions but note that telcos may be selective on the quantum this time given the likely demand-supply imbalance and annual auctions," analysts at JP Morgan said in the note.

The annual cash outflow is estimated at 2,840 crore for each telecom operator for over 20 years, which will impact the earnings before interest, taxes, depreciation, and amortization (Ebidta) of Vodafone Idea the most and Bharti Airtel the least till March 2025. To mitigate the impact, Arpus would have to be increased by 6% for Vodafone Idea and 3% for Reliance Jio and Airtel, they said. For the quarter ended March, Airtel had an Arpu of 178, followed by Jio at 168 and Vodafone Idea at 124.

Analysts, however, cautioned that in the past telcos have bid for more spectrum than expected, so an upcycle in telco capex over FY24-25 could follow from substantial bidding in these auctions and is, therefore, a risk.

However, the key issue is captive 5G networks, which may pose a threat to telcos’ enterprise revenue pipeline as most use cases will be enterprise-driven. The government is yet to come up with modalities and pricing of direct spectrum allotment to enterprises. The three telcos had expressed strong views against such allotment.

“Enterprises being permitted to directly obtain spectrum to set up captive non-public networks is a more concerning situation given that the 5G opportunity is a play on enterprise solutions rather than retail consumers," analysts from Kotak Institutional Equities said.

However, a section of experts said the concerns were not well-founded. “Large enterprises will accelerate private network ecosystem and aid growth in telcos’ enterprise business," said Sanjesh Jain, vice president, equity research, telecom, media and chemicals, ICICI Securities.

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