Spectrum auction blows holes in telcos, govt maths

After the battle for spectrum, which was spread over five days and cost nearly $10 billion, the focus will now shift to the big war brewing in the marketplace between incumbent operators and Reliance Jio.

However, the industry as a whole, and particularly the incumbent players, go into this war severely hamstrung by heavy debt levels, made worse by the payouts at this auction to acquire spectrum for data services in order to take on Reliance Jio.

While Airtel has consolidated its pan-India footprint for data services, Idea Cellular and Vodafone, which had remained passive bidders in the previous rounds of auction, somewhat aggressively acquired enough spectrum in this round to give them the ammunition to take on RJio.

Bharti Airtel, which acquired 173.8 MHz spectrum for ₹14,244 crore, now has 4G and 3G spectrum in all circles. In the latest auction, Airtel built new data capabilities in seven circles. The company has spent ₹10,340 crore towards enhancing data capacities in 15 circles. It has also spent ₹321 crore towards completing some of the existing partial blocks in four circles, giving it a second carrier for its future needs.

Idea Cellular acquired 349.20 MHz for ₹12,798 crore. It acquired additional 74.6 MHz spectrum on 1800 MHz and 2100 MHz bands, and 200 MHz of capacity spectrum on 2300 MHz and 2500 MHz bands. This enables Idea to establish its mobile broadband footprint across all 22 licensed service areas. Vodafone, the most aggressive bidder, has acquired spectrum in all its key telecom circles for ₹20,280 crore.

Top 3 are tanked up “We believe the top 3 telecom companies have adequate 4G spectrum to counter RJio, making it more competitive to poach subscribers,” said analysts at Bank of America Merill Lynch.

Reliance Jio, on the other hand, purchased additional spectrum in the 800 MHz, 1800 MHz and 2300 MHz bands for ₹13,672 crore, consolidating its 4G play.

“The data play is on the rise, and there are indications that operators are filling their network coverage gaps to secure a wider footprint and to augment capacities,” said Prashant Singhal, Global telecom leader at EY.

But the payout for acquiring all this spectrum has also left the operators among the highest leveraged companies. Cumulative bids in auctions since 2010 now total ₹3.5 lakh crore. For an industry with annual revenues in the vicinity of ₹1.8 lakh crore and EBITDA around ₹50,000 crore, these are not small numbers.

Rising debt levels “Spectrum acquisition for bolstering the data capabilities has been the theme of these auctions. However, the debt levels of the industry will remain elevated at an estimated level of ₹4,25,000 crore. We estimate the industry debt to remain weak,” said Harsh Jagnani, VP – Corporate Ratings, ICRA Limited.

Analysts at Credit Suisse said high payouts towards spectrum are a unique Indian phenomenon that damages returns immediately.

“It appears to us that competitive compulsions have forced more aggressive bidding. Any potential upside from this will be limited by the entry of large-scale operator RJio.

“We continue to stay cautious on the Indian telecom sector,” they added.

With rising competitive intensity, the operators will not have pricing power as tariffs will remain under pressure.

Telecom operators also have to further invest heavily to roll out networks to use the spectrum they have bought.

Ajay Srinivasan, Director, Crisil Research, said, “Cumulatively, we expect the top 3 telcos to spend around ₹80,000 crore in network capex over the next two years, which is 25 per cent higher than the aggregate network capex in the previous two fiscals. This comes at a time when profitability and operational cash flows are expected to come under pressure with the launch of Reliance Jio services.”