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Telecom Sector: 2G spectrum auction nets Rs. 61,162cr
After 10 days of intense bidding, eight telecom companies, including Bharti Airtel, Vodafone India (Vodafone) and Idea Cellular (Idea), yesterday, bought spectrum worth a total of Rs.61,162cr against the government’s estimate of Rs.47,933cr. The companies are required to pay 33% of 1800MHz spectrum and 25% of 900MHz spectrum price upfront and rest can be paid in ten installments along with an interest component after two years moratorium period. The Government will now get revenues of Rs.18,296cr this fiscal from the auction against the initial projection of Rs.11,340cr.
900MHz: The value of the premium 900-MHz band spectrum, available only in three metro circles of Delhi, Mumbai and Kolkata, stood at Rs.23,590cr (85% higher than the value at the reserve price - Rs.12,574cr). Here, Bharti Airtel and Vodafone, whose licenses are expiring this year, managed to get the desired quantity of radio waves to ensure uninterrupted services to their customers. This was higher than expectations; companies went for aggressive bidding as the quantum available was not large and the incumbent operators were forced to bid as their spectrum was being refarmed. The top three incumbent operators – Bharti Airtel, Vodafone and Idea have shown considerable aggression in the auctions. Bharti Airtel and Vodafone have been able to retain at least 5MHz of spectrum in the 900MHz band in Delhi, Mumbai and Kolkata. Vodafone appeared to be the most aggressive and won 11MHz of this prized spectrum in Mumbai while Idea too has won 5MHz in Delhi. Kolkata saw Bharti Airtel and Vodafone win 7MHz each (they held 6.2MHz and 7.8MHz pre-auctions).
1800MHz: In the 1800MHz band, radio waves were available in all the 22 telecom circles; the net value was put at Rs.37,574cr. 78 blocks of the 385MHz spectrum in the 1800MHz band remained unsold. In order to make up for the shortfall, if any, in the 900MHz band, Bharti Airtel and Vodafone have topped it up with 1800MHz spectrum in these three metro circles. Bharti Airtel’s strategy seems to be of acquiring spectrum in current and future auctions, thus reducing future risk of renewal. Reliance Jio did not win any spectrum in the 900MHz band; it won 1800MHz band spectrum in 14 of the 22 circles – largely concentrated in the Metros and Category-A circles. Reliance Communications acquired merely 0.6MHz in 1800MHz band in the Mumbai circle. Amongst other challengers, Telewings (currently operating in six circles) has added Assam as a new circle with 6MHz of 1800MHz and added 1-2MHz of capacity spectrum in four existing circles. Aircel won 1-2MHz in five existing circles while Tata Teleservices completely stayed away from bidding despite submitting an earnest money deposit of ~Rs.270cr.
Payouts: Bharti Airtel and Idea are required to shell out Rs.5,425cr and Rs.3,240cr, respectively in FY2014. Total payouts for these companies stand at Rs.18,530cr and Rs.10,716cr, respectively. Total spectrum payouts for Vodafone and Reliance Jio come out to Rs.19,645cr (Rs.5,582cr upfront) and Rs.11,054cr (Rs.3,648cr upfront) respectively. The upfront payouts mentioned above assume that the operators take the deferred payment option available to them; the balance amount needs to be paid in 10 equal installments over 10 years after a two-year moratorium. The total bid value was of Rs.61,162cr with upfront payment to the exchequer being Rs.18,296cr.
Outlook: A large part of the spectrum won by incumbent players in recent auctions is aimed at protecting their current revenues as against grabbing new revenues. We believe increased financial pressure on these companies would lead to increase in voice base rates for the telecom industry. In addition, the three incumbent players – Bharti Airtel, Vodafone and Idea bought 1800MHz spectrum in few circles where they did not face a renewal situation; the key objectives could be to 1) buy spectrum if renewal prices go beyond comfort levels in future, keeping a fallback option, and 2) use 1800MHz for rolling out FD-LTE networks and fill in the gaps in their 3G spectrum footprint.
We have cut our FY2015E earnings for Bharti Airtel and Idea by 0-12% after incorporating the spectrum related payout, interest costs for debt funding, and spectrum related amortization costs. We have not changed our operational revenue and EBITDA estimates as we do not foresee material change in competitive intensity in the near term. Currently, we maintain our Neutral view on the telecom sector.
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