Telecom operators to bid cautiously in spectrum auction, say analysts

Even though sectoral regulator Trai has recommended a reduction in spectrum prices, telecom operators are expected to bid cautiously as they already have high leverage levels, which would constrain their participation in the auction.

According to analysts, telecom operators may look at adding spectrum in their existing portfolio to expand capacity rather than going the whole hog to acquire airwaves in the premium 700 Mhz band or the newer 3300-3600 Mhz band, which will be best suited for 5G services.
 

Telecom Regulatory Authority of India (Trai) has given its recommendations for the next round of spectrum auction, which will be the biggest ever in terms of quantum of airwaves to be put on sale. The timing of the auction is yet to be decided by the Department of Telecommunications (DoT).

Tanu Sharma, Associate Director, India Ratings and Research said that top telcos already have high leverage levels, which would constrain their participation in the spectrum auction despite the lower recommended reserve prices. Bharti Airtel has a net debt to EBITDA ratio of 3.6x (on trailing twelve months basis). Vodafone India and Idea Cellular on a combined basis have a net debt to EBITDA position of 10x in FYE 2018.
 

Trai has recommended that reserve price of 700 MHz band should be equal to 2x of reserve price of 1800 MHz spectrum band (most popular LTE band). For 700 Mhz band, the reserve price for pan-India 5 Mhz spectrum comes out to be Rs 328.4 billion as compared to Rs 550 billion in 2016, a reduction of about 42 per cent.

Edelweiss said it did not expect strong demand for 700 Mhz spectrum considering that there is relatively low maturity of 700 Mhz ecosystem in terms of handsets and network equipment, persistently high cost ($10 billion incremental commitment for pan-India rollout) of overall deployment and weak balance sheets of incumbent operators. 
 

Analysts said industry revenue and profitability has worsened significantly post the previous auction which is not reflecting in the spectrum price recommended by Trai. Spectrum in India has decisively turned into a buyer’s market and operators are likely to acquire spectrum only as and when they need it; they are likely to be selective based on their needs rather than accumulate spectrum, BNP Paribas said.

At current tariffs, operators’ revenues are not able to cover their operating costs and network capex, and their free cash flows are not enough to pay interest on spectrum acquired in the earlier auction.
 

We believe operators could selectively augment existing spectrum portfolio across the 800-2500 MHz bands, rather than bid for fresh 700 MHz, if the auctions are held in the next 6-9 months, Morgan Stanley said.
 

The pace at which operators will be able to re-farm existing spectrum holdings from 2G, 3G and 4G to 5G would be another factor affecting the relative levels of supply and demand. Regarding 3300-3600 Mhz spectrum band, Edelweiss said telecom operators are unlikely to participate given that 5G standards continue to evolve, lack of commercial use cases for 5G and significant investments have been made in 4G.