Telcos need 5-paise ARPM gain to offset spectrum cost-Crisil

~Rs 900 billion expected to be paid for airwaves at March auction, says Crisil

Crisil estimates operators will shell out over Rs.900 billion to bag airwaves in the upcoming telecom auction. With nearly half of Rs.1,200 billion annual revenues at stake for the large operators, the importance of the forthcoming auction of spectrum can't be overstated. The bidding will be driven by demand for 900 MHz spectrum, considered most efficient for wireless telephony. Slated for March, the auction will see fierce bidding by operators trying to retain their share of spectrum in the 900 MHz band and others wanting to get some of their own for the first time amid limited supply. Telcos face a herculean task of cranking up their blended average voice and data revenue per minute (ARPM) by 5 paise to generate additional cash flows needed to service incremental debt.

Of the total payments to be made, the upfront payment to government will be about 30%; operators are expected to opt for deferred payment for the balance. Though repayments are spread over 10 years and begin after a moratorium of two years, says Sudip Sural, Senior Director, Crisil Ratings: Indebtedness in the sector is expected to increase by around Rs.700 billion, or a third of current debt.

Licences for over 60% of the total 900 MHz spectrum currently held by the large operators are up for renewal. We expect some players to also bid for 900 MHz spectrum in circles where they don't have any to support their growing subscriber base, improve customer experience and offer 3G services.

The strategy to retain spectrum will differ between operators and bidding is also likely to be circle-specific. We believe operators will calibrate their bidding based on four factors:

Back-up spectrum bought in the 1800 MHz band during the previous auction, which forms about 70% of the expiring spectrum in 900 MHz

Incremental capex required if players are unable to win back 900 MHz spectrum

Reserve price that's 30% more than what was discovered at the previous auction, and

Revenue implication of losing a circle

CRISIL estimates overall pricing in the 900 MHz band could go up to 1.5 times the reserve price because of scarcity premium, with some high-revenue circles commanding an even greater multiple. As for other spectrum bands, competitive intensity would be moderate. In case of 1800 MHz band, operators already hold sufficient spectrum, while in case of 2100 MHz, additional spectrum supply is expected in the near future.

The auction will bloat debt levels of telcos in the form of deferred payments due to the government. The combined debt/EBITDA levels of large operators could increase to 3.5-4.0 times after the auction from 3.3 times now. In the last 18 months, telcos' ARPM has increased by around 2-3 paise to 47 paise, riding on a booming data business and selective tariff hikes. Says Manoj Damle, Director, CRISIL Ratings: Another increase of 5 paise will not be an easy task in the face of intensifying competition, especially in data. Ability to increase ARPM will be a key monitorable.

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