Home / Markets / Mark To Market /  Overspending on 5G auction key risk for telecom stocks
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The Cabinet has cleared much-awaited 5G spectrum auctions in India, approving the auction of 72GHz of 5G spectrum across various frequency bands. The reserve price of spectrum is unchanged from the telecom regulator’s recommendations in April 2022. The telecom companies (telcos) had made representations for a 90% cut in reserve price of spectrum, however, analysts note that the reserve price is only 35-40% lower than April 2018 levels.

Although reserve prices are higher than requested, analysts at Kotak Institutional Equities expect telcos to partake in auctions, and take up meaningful quantum of spectrum to enable the rollout of 5G services in India. The last date for submitting of bids is 8 July and commencement of auctions is scheduled on 26 July.

However, analysts at Motilal Oswal Financial Services Ltd point out, history shows that telcos tend to engage in heavy investments in telecom auctions to match the competition. “This could be a key overhang on stocks. Vodafone Idea Ltd particularly could participate to some extent given the lower initial investment," said the Motilal Oswal report dated 16 June.

The report further added that strong free cash flow of over Rs20,000 crore and Rs25,000 crore for Bharti Airtel and Reliance Jio, respectively, is sufficient to meet its investments in 5G spectrum, without an increase in debt. “But the risk of higher capex toward 5G does increase with the lack of a sharp fall in pricing," said the report.

Besides, enterprises that want to set-up captive non-public networks can directly obtain spectrum from the department of telecom. The provision for enterprises remains a worry given that the 5G opportunity is a play on enterprise solutions rather than retail consumers, said the Kotak report. Investors should note that this provision is not yet finalized and will be a key monitorable in a run up to the auctions.

Meanwhile, apart from how the 5G auctions pan out, another key trigger for the telecom sector would be price hikes, which are key for the sector's average per user outlook.

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