Spectrum to be a hardsell as telcos are stretched: Pros

The biggest worry is that telecom operators have already spent a lot of money in spectrum in the previous round of auction, said Sanjay Kapoor, Former Chief Executive Officer of Bharti Airtel. Telcos in the country are always spectrum-hungry, but they do not have the money for investments to deploy it. So the response at the auction this time will be very muted, he says, adding that spectrum will be picked up very cautiously by operators.Nitin Soni, Fitch Ratings, says the balance sheet of all the telcos are stretched. So he doesn't expect alot of action at the auction. He feels the most popular frequency is going to be 1800 MHz to provide LTE services.Rajan S Mathews, Director General, Cellular Operators Association of India, also feels 1800MHz is going to be the key area of interest among the telcos. He says that even though most of the announcements were positive, the government may not be able to rake in alot of money.Below is the verbatim transcript of the discussion.Q: What are your key takeaways from what the Telecom Secretary had to tell us?Mathews: Many positive elements in the NIA announcement by the honorable Secretary. So quantum of spectrum is definitely a positive in terms of being able to set the spectrum usage charge (SUC) at a flat rate of 3 percent for this incremental spectrum; that is clearly a win. In terms of the rollout obligations not being that onerous but being covered by existing bands is very positive. The fact that the funding mechanism is stride to at the variable rate, hopefully, that will change over the term of the installment payments.So, lots of very good positive, the 30-day allotment component that commitment, very positive and the fact of contagious spectrum, very positive. So, lots of very good things in the NIA that has been announced. Obviously the critical issue is going to be one of uptick, what is the industry’s appetite? Clearly 1800 MHz is going to be one of the key areas of interest. 700 MHz as we have been saying maybe some very limited uptick and interest, some interest in 2100, 2300, 2500, 2700 tend to be the question mark in terms of spectrum.Q: Could you reconfirm what the total amount of spectrum auctioned will be? He gave us a figure of 2354.5 MHz. Will the 234 MHz of harmonised spectrum be over and above it or did the figure 2354 MHz include the harmonised spectrum bit as well from 1800 MHz and 800 MHz?Mathews: I believe it included it because the harmonisation, the 1800 MHz which was freed up as a result of the harmonisation, was included in that. However, again, we will have to wait to see the details once the NIA document is available to us. Q: Tell us the key positive in the Notice Inviting Application (NIA) this time around as well as the negatives?Kapoor: Well, I think I tend to agree with my friend, Rajan that lot of spectrum being put on the table simultaneously actually takes away any artificial scarcity that gets created and therefore the real price really comes to be bid by everybody, I think that’s very positive. All other points that Rajan has already covered, I don’t want to repeat, but I think they are all positive.My big worry would be that after operators have spent a lot of money on spectrum in the last round and there is a re-farming of spectrum that is happening as you and I talk to each other of the existing spectrum that got renewed. If that is true then a lot of monies have to be committed to the use of existing spectrum and the last bid spectrum, which is still not seen by us and therefore if that has to be done than lots of monies have to be committed to that. Given that does the industry now have an appetite to amass more spectrum and then back it with more investment to deploy it, because we also have to keep in mind that fibre backhaul is going to be a quintessential part of India’s data story and that’s an investment that really has not happened in India as yet and I hope over the next few years that happens to make our entire backbone very robust for a great data consumer experience to follow.So I think given the scenario, I think the spectrum will be picked very cautiously by operators. I tend to agree that a little bit of 1800 to make sure that it is deployed rightly behind LT and also some bands of 700, where 700 in some circle is very close to the price of 900. I think they should get picked, but will it be a big bounty for the government where people will really go crazy bidding, I don’t see that happening given the commitments that operators have in hand today. Therefore I think the response should be a little muted. It should not be an outrageous response like the one that we have seen in the past, because there was an artificial scarcity of spectrum. Overall, it seems positive I think government is thinking in the right direction.Q: Would you like to hazard a guess of how much the government could possibly rake in, given the stretched balance sheets, as well as the requirement of the telecom operators.Kapoor: Crystal ball gazing at this stage is being foolhardy. I wouldn’t do that, but I can make a very wild guesstimate to say that, this time round that the government will be able to amass will be significantly short of what their aspiration is, because given the balance sheets of all operators and given the pending commitments that they have to still roll out the 3G and 4G services and like I said a fibre backhaul is going to stretch them even more than what is there today, unless and until this country begins to see a significant improvement on price extraction from the consumers.If that happens than the viability of operators goes up, which should happen according to me. Good quality data services are not going to happen at the current pricing. It is going to be very tough, but while I say that you also have a big scare about new operator coming into the market who is going to be hopefully very competitive and is going to give run for money to everybody, so I think given those circumstances operators’ ability to raise prices at this stage is really a constraint and if that is the constraint and all the other obligations is still pending of rolling out 4G and 3G, I think the response will be rather muted and the government going to fall of its aspiration significantly. Q: Most of the experts have highlighted a couple of positives, the biggest one being the quantity of spectrum which could be auctioned which could result in rationale bidding and cautious pickup demand by the operators. Your initial reading and would this in any way change the credit profile of the operators that you track?Soni: We believe that most of the telcos already have a stretched balance sheet except the market leader Bharti Airtel where leveraged number is about 2.5 times. There will be limited participation in the upcoming auction. We believe most telcos have sufficient spectrum assets. They may try to fill up the gaps for 1800 or 2300 MHz where they do not own the spectrum to launch 4G services but we believe that there will be limited type for 700 MHz spectrum given the efficiency key ins from deploying 4G services on 700 MHz will be insufficient to offset the relatively high reserve price which was announced earlier by the TRAI which - if I remember correctly - was about Rs 115 billion for a block of 700 MHz spectrum. For full interview, watch accompanying videos...