5G spectrum. Airtel, Jio may have to cough up ₹35,000 crore for 5G spectrum

Bharti Airtel and Reliance Jio will have cough up at least ₹35,000 crore to acquire pan India 5G spectrum going by the reserve price set by the telecom regulator. The operators will be eyeing spectrum in the 3500 Mhz band and the 700 Mhz band for 5G spectrum, but since the pricing for the former is much lower, the operators are likely to focus on acquiring more spectrum in the 3500 Mhz band. If the operators want to aqcuire even 20 MHz more in the 700 Mhz band then they will have to pay another Rs 39, 000 crore each

According to the TRAI’s recommendations issued on Monday, spectrum in the 700 Mhz has been priced at ₹3,900 crore per Mhz and at ₹320 core per Mhz in the 3500Mhz band. An operator will need at least 100 Mhz of spectrum to offer any meaningful 5G services. This means that an operator will need at least ₹32,000 crore to acquire pan India spectrum in the 3500 Mhz band. In addition, spectrum in the 700 Mhz band will be needed to high-density areas where coverage will be crucial. Spectrum in the sub-Ghz bands is more valuable due to their efficient propagation characteristics compared to higher frequency bands.

“Given the cut in reserve prices, we now expect Bharti and Jio to selectively bid for 5G spectrum. We expect interest in 600/700MHz to be limited, although some “top-ups” in 800/900MHz cannot be ruled out. The main interest, however, will be centered on 3500MHz, the most commonly used spectrum for 5G. Assuming each of the companies acquires 100MHz in the 3500MHz band in the top 10 circles (based on revenues), we estimate total outlay at ₹19,000-20,000 crore ($2.5-2.7 billion) taking Bharti’s FY23e net debt to EBITDA from c1.06x to 1.30x. The new recommendations also give telcos the option to pay upfront or opt for deferred payments, which would limit annual cash outflow in the first 2-3 years,” said analysts at UBS.

Experts said that unlike the previous rounds of auction where 700 Mhz was left unsold due to its high reserve price, this time the 40 per cent cut in pricing could help find buyers. “Heeding to long pending demand and with spectrum remaining unsold in the 700MHz band, we believe that the band could finally see some demand from telcos in the coming auction with TRAI cutting the reserve prices for spectrum in 700MHz band by 40 per cent. This has reduced the premium vs 800MHz spectrum from 39 per cent earlier to 8 per cent now. However, extent of demand could be lesser with Airtel already having completed its pan-India sub-GHz spectrum footprint and Jio also beefing up its sub-GHz spectrum holdings in the 2021 auction. While the reserve price for 700MHz spectrum is higher when compared globally, we note that it is also true for spectrum in general in India. Also, while price for 3.4GHz 5G spectrum was reduced by 36 per cent, it was lesser than telcos demand for 90 per cent reduction,” said a report by Credit Suisse.

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While Airtel and Jio are expected to acquire the required airwaves for 5G services at these prices, its not clear how Vodafone Idea will play it out. Although Vodafone Idea is in much better position financially now compared to last year, the operator may not find it easy to find the cash required to participate in the upcoming auction. “We believe that TRAI recommendations are incrementally positive with the regulator recommending spectrum price reductions of 25-50% (though less than telcos’ desired range). Airtel and Jio are well-positioned to participate in the upcoming 5G auctions while VIL’s ability to effectively compete in 5G auctions is constrained due to the weak balance sheet,” said analysts at Credit Suisse. Things could change if Vodafone Idea is able to find a strategic investor in the next 2-3 months.

Bidding to be muted

The overall auction may end at the reserve price because there are only two strong operators and there is more than adequate supply of spectrum. Unlike in 2010 when the government had put a limited amount of spectrum for sale, this time the regulator has proposed to put more than 1 lakh Mhz of spectrum for auction. “Spectrum supply remains adequate to easily accommodate three players for C-band and thus, we expect bidding intensity to remain muted in the upcoming auction” said analysts at ICICI Securities.

“In our view, although the reduction in reserve price is far lower than what the telcos had demanded, the winning price would be equal to the reserve price as it will be essentially a two-player bidding process. It would be critical to see the bidding behavior of telcos towards both 3300-3670Mhz and 700Mhz. It would be taken negatively if both spectrum bands are acquired on a pan-India basis. Since the 5G ecosystem is yet to evolve globally with noticeable use cases, we believe that the risks around monetization timelines remain unchanged,” said analysts at Emkay