Spectrum auction: Bidding war could dent telcos' balance sheets

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As seven spectrum bands go under the hammer, telecom operators are actively bidding for airwaves sales worth Rs 5.63 lakh crore. Starting from October 1, key telecom players like Reliance Jio, Vodafone, Idea Cellular and Bharti Airtel are vying for  bands 700 Mhz, 800 Mhz, 900 Mhz, 1800 Mhz, 2100 Mhz, 2300 Mhz and 2500 MHz, which can be used for 2G, 3G and high-speed 4G mobile services. Spectrum sale is seen to be crucial for the industry as operators gear up for next-generation telecom services. Most of the participation was in 1800 and 2300 MHz bands, with 57 percent of total bids contributed by these two bands in day 1. All spectrum up for sale in the 2300 MHz band were sold out on day 1, but there were no bids in any circle for 700 and 900 MHz bands.  The 3G spectrum (2100MHz) was also bid for mainly in low data penetration markets (the B and C-circles). The coveted 700 MHz band is used worldwide for 4G signals due to its efficient characteristics allowing it higher penetration capability inside buildings and wider coverage, which reduces number of towers required for setting up LTE network.

The premium 700 Mhz band is auctioned at a reserve or base price of Rs 11485 crore per Mhz. The cost of delivering mobile services in this band is estimated to be around 70 percent but lower than 2100 Mhz band which is used for 3G services. Any telecom player willing to buy 700 Mhz band will have to pay minimum of Rs 57425 crore for a block of 5 Mhz on a pan-India basis. Goldman Sachs expects telecom operators to wait for prices to fall in this band before they show any interest.

It sees total bidding to be less than 10 percent total with no renewal spectrum for top 3 operators, unlike auctions in 2014 and 2015 as Bharti and Jio have bolstered their spectrum holding in the recent spectrum auctions and through spectrum trading/sharing arrangements. It expects them to selectively participate to plug remaining gaps and increase data capacity.

Vodafone and Idea Cellular are likely to bid for spectrum enabling them for expansion of 4G footprints. Reliance Jio, Airtel and RCom already have pan-India 4G spectrum. Idea has 4G spectrum in 10 out of 22 telecom circles in the country. Vodafone has spectrum for 4G services in 9 telecom circles. 

So, how will this spectrum auction impact telecom industry?

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Nasrin Sultana

Special Correspondent|Moneycontrol.com

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According to Morgan Stanley, multi-spectrum band auction may further dent balance sheets. It expects Reliance Jio and Vodafone to spend Rs 109 and Rs 105 crore, respectively, followed by Idea at Rs 6700 crore or Rs 13 per share and Bharti at Rs 5300 core or Rs 13 per share. Thus, it feels net/debt to EBITDA will remain high in FY17, more so for Idea at 3.2x and Airtel at 2.4x.

Agrees Goldman Sachs that Idea's expect net debt/EBITDA to may rise 3.8 times by FY17.It feels despite investment in new spectrum, Idea will continue to have a spectrum disadvantage against Bharti/Jio, who are likely to use the upcoming auction to increase their spectrum lead.

“We expect Bharti to have 1104 MHz of liberalized spectrum (capable of 3G/4G deployment), higher than Jio at 919 MHz and Idea/Vodafone at 684 MHz/712 MHz. Bharti’s overall spectrum at 1303 MHz is likely to be meaningfully higher versus Jio, and we expect Bharti’s superior spectrum holding to be a key driver of its market share gains versus Vodafone/Idea and its ability to defend its market share versus Jio,” it says in a note.CLSA adds that Idea Cellular and Vodafone will boost 3G/4G spectrum but balance sheets will be further burdened with an estimated high gearing of over 4 times net debt to EBITDA.Consolidation?

Most analysts think that spectrum auction will likely accelerate sector consolidation. Morgan Stanley feels that consolidation may increase competitive intensity contrary to traditional market theory. It says rising competition coupled with higher balance sheet leverage is driving consolidation and smaller players are merging to become stronger.

Goldman Sachs also says that spectrum auction may accelerate merger and acquisition. "Videocon/Telenor has not applied to take part in the auction, indicating they may be looking to exit the market. We expect less than 95 percent of 2016 spectrum to be bought by top 3 and Reliance Jio. New spectrum supply has increased overall spectrum cap in each circle by 66 percent, which we believe will make M&A among larger players," it says.

CLSA estimates the top operators will acquire 21 percent of the total spectrum worth USD 8 billion at reserve prices.Top bets

Morgan Stanley has lowered industry data revenue estimate to 26 percent CAGR from a 40 percent in FY16-20 CAGR and cut voice revenues CAGR to negative 1 percent from 2 percent for the same period. With lower data growth, it has cut FY17 and FY18 EBITDA estimates for Idea (-6 percent and -11 percent) and Reliance Communication (-16 percent and -18 percent). We remain UW on Idea.

It is overweight on Reliance Communication with its expected tower sales and Jio synergies in 4G/infrastructure sharing but says that side effect of consolidation is slower tenancy growth for tower companies and cuts Bharat Infratel 's estimated Fy17/18 tenancies by 3 percent each. It is underweight on Idea.

Goldman Sachs has a buy rating on Bharti Airtel expecting it to further augment its data capacity in the next auction as it has the largest 3G/4G spectrum footprint inIndia.

Follow @NasrinzStory(Data infographics by Ritesh Presswala)Disclosure: Reliance Jio is a part of Reliance Industries that owns Network 18 Media & moneycontrol.com