The upcoming telecom spectrum auctions slated for October 2016 will accelerate the ongoing industry consolidation, whereby the top telecom companies (telcos) will strengthen their spectrum holding positions, further marginalizing smaller telcos, which are unlikely to meaningfully participate and invest further, says India Ratings and Research (Ind-Ra). Ind-Ra expects Vodafone India Limited (Vodafone) and Idea Cellular Limited (Idea) to be active bidders in the upcoming spectrum auctions for their 4G network rollout, and Bharti Airtel Limited (Bharti) - the most diversified spectrum holder - will look to bridge the gaps in its spectrum.

The proposed auction addresses supply side issues adequately, since the spectrum which has been put under auction represents 87 percent of the existing spectrum. The bidding is anticipated to be more balanced than the previous auctions in 2015 and 2014, where spectrum acquisition was driven by license expiry and hence continuity of operations. Participation will also be affected by the steep pricing of 700 MHz band which constitutes 72 percent of the aggregate spectrum value at the base price.

Top Five Circles for Key TelcosInd-Ra opines that the top telcos already have moderate-to-high leverage levels, which will weigh on their participation. Idea reported a higher net debt/EBITDA ratio in FY16 at 3.25x– (FY15: 1.31x–), which is its peak financial leverage of the last five years. Bharti's financial leverage was 2.4x– at FYE16, which is expected to go up in FY17 with the increase in CapEx and margin moderation due to the intensifying competition in the data segment. Reliance Communications Ltd. (RCom) on the other hand is highly leveraged (net debt/EBITDA: 5.6x— in FY16). Ind-Ra also expects key players to invest in profitable and bigger circles and rationalize spectrum in others and divest non-core assets to free up capital for investment into 4G long-term evolution (LTE) infrastructure.

Bharti has the largest spectrum holding at present, of the total 770 MHz, across bands (900, 1800, 2100 and 2300 MHz), followed by Reliance Jio Infocomm Ltd. (RJio), which holds 596 MHz spectrum across 800, 1800, and 2300 MHz bands. This puts Vodafone (302 MHz) and Idea (271 MHz) at a disadvantage since they do not possess airwaves in the 2300 MHz category. Each of the top telcos is likely to bid in its respective top five circles by revenue, to plug in the data spectrum gaps in an effort to strengthen established operations.

Ind-Ra expects limited participation compared to the quantity put on sale, as one-third of the spectrum supply is of the high-priced 700 MHz band, which is 3x–4x— more expensive than 900/1800 MHz bands and also involves a new ecosystem. Telcos' interest, however, would be higher in circles where the pricing of 700 MHz is lower than that of 800/900 MHz bands (Bihar, Madhya Pradesh, Uttar Pradesh-East, and Uttar Pradesh-West), or where spectrum in 800 and 900 MHz bands is not put to auction (Assam, Jammu and Kashmir, and North-East). The 1800 MHz band could generate higher interest as it is an alternative band for 4G and priced cheaper than 700 MHz. The 2500 MHz is also a new ecosystem and participation is expected to be muted.

The indicative schedule for payment under the deferred payment option for 1800, 2100, 2300, and 2500 MHz bands includes the upfront payment of 50 percent of the bid amount and the balance after a moratorium period of two years in 10 equal annual installments, at an interest rate of 9.3 percent p.a., reduced from the earlier 10 percent in the spectrum auction of 2015. Telcos that win spectrum in 700, 800, and 900 MHz bands will need to pay 25 percent upfront and the balance after a moratorium of two years in ten equal annual installments, with interest.

The Indian telecom sector is at an inflection point of massive data adoption, repeating the precedence of the voice market growth trajectory (2007-2011) and, therefore, necessitating continued investment in the key resource - spectrum - during the coverage expansion phase. The spectrum acquisition will be subject to market evolution, and 4G network rollout is expected to be undertaken pocket-wise, covering high-data-consumption residential and commercial locations instead of a circle-wise rollout.

Courtesy: India Ratings and Research

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