The proposed auction addresses supply side issues adequately, since the spectrum which has been put under auction represents 87% 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 be also affected by the steep pricing of 700MHz band which constitutes 72% of the aggregate spectrum value at the base price.
Ind-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 rationalise 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 770MHz, across bands (900MHz, 1,800MHz, 2,100MHz and 2,300MHz); followed by Reliance Jio Infocomm (RJio), which holds 596MHz spectrum across 800MHz, 1,800MHz, and 2,300MHz bands. This puts Vodafone (302MHz) and Idea (271MHz) at a disadvantage since they do not possess airwaves in the 2,300MHz category. Each of the top telcos are likely to bid in their 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 700MHz band, which is 3x-4x more expensive than 900MHz/1,800MHz bands and also involves a new ecosystem. Telcos' interest however would be higher in circles where the pricing of 700MHz is lower than that of 800MHz/900MHz bands (Bihar, Madhya Pradesh, Uttar Pradesh -East and Uttar Pradesh -West), or where spectrum in 800Mhz and 900Mhz bands is not put to auction (Assam, Jammu and Kashmir, and North East). The 1,800MHz band could generate higher interest as it is an alternative band for 4G and priced cheaper than 700MHz. The 2,500MHz is also a new ecosystem and participation is expected to be muted.
The indicative schedule for payment under the deferred payment option for 1,800MHz, 2,100MHz, 2,300MHz and 2,500MHz bands includes the upfront payment of 50% 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%p.a., reduced from the earlier 10% in the spectrum auction of 2015. Telcos that win spectrum in 700MHz, 800MHz and 900MHz bands will need to pay 25% 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.
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