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Not a Pretty Picture

The upcoming spectrum auctions are likely to get a subdued response despite the steps to woo telecom companies.
By Manu Kaushik | Print Edition: September 11, 2016
Not a Pretty Picture
Photo: Ajay Thakuri

In early January, the telecom regulator TRAI organised an open-house discussion in Gulmohar Hall at New Delhi's India Habitat Centre. The aim was to take the opinion of stakeholders before finalising the blueprint for the year's spectrum auction from which the government expects to net $87.1 billion (Rs 5.6 lakh crore). The issues discussed included the quantum of spectrum to be auctioned, block size, rollout obligations and reserve price. The auction is scheduled for September-end.

Those representing telecom companies wanted the government to delay the sale of the 700 MHz band, the focal point of the auction, says an executive of a telecom company. They argued that their companies were financially strained and would find it difficult to pay for this expensive band. Plus, the device and equipment ecosystem for this band was not fully developed, they said. In spite of these objections, the telecom ministry has decided to go ahead and sell the 700 MHz spectrum too, though it has, at the same time, also taken steps to make things easier for telecom companies - it has reduced the equity lock-in period from three years to one year, slashed the interest rate for the deferred payment option from 10 per cent to 9.3 per cent, eased the rollout obligations, and lowered the spectrum usage charge or SUC.

However, experts say these measures are unlikely to help telecom companies, as they have been left with little financial muscle after paying through their nose for spectrum and acquisitions over the years. The spectrum cost is the biggest deterrent and the government has done nothing to bring it down, they say. Airtel India's MD and CEO Gopal Vittal has said on several occasions in the past that the price of the spectrum is unaffordable for them. Airtel is India's largest telecom company.

The False Rationale

So, why did the government decide to go ahead with such a large auction? The reasons, say experts, are many. By holding the largest-ever spectrum auction - 3,786 MHz airwaves on sale compared to 942 MHz in 2015 - it wants to address the problem of shortage of spectrum for telecom, a big reason for the poor quality of services. In India, the average spectrum holding of an operator is 18 MHz; the global average is 50 MHz. The telecom ministry has been struggling to make more spectrum available for telecom services. For instance, the 700-MHz band was earlier used by Doordarshan, armed forces and other state agencies, and it took years of convincing to make them vacate it for telecom services. The second reason is that this band is best for offering data services due to wider coverage, which lowers the required capital expenditure and ensures faster rollout of services. Providing broadband on this band is 70 per cent cheaper than providing it on the 2,100-MHz band. That is why the quantum (770 MHz) and reserve price for it far exceed that for others that will be sold on September 29 - the price is roughly 71 per cent of the total amount the government plans to earn in the auctions.

"Since the entire telecom market is focusing on data, there's no better spectrum than 700 MHz for 4G services. This could have been behind the telecom ministry's thinking," says a telecom analyst. But a number of experts say the sale could have been timed better. To begin with, they say, the size of the auction, Rs 5.6 lakh crore, is way beyond what the sector can afford. The reason is over-leveraged balance sheets. The industry's debt as on March 2016 was close to Rs 4 lakh crore, as per CRISIL; its gross annual revenues are close to Rs 2.5 lakh crore. Recent acquisitions have added to the stress. Airtel, for instance, has almost bought Videocon Telecom and Aircel's spectrum in eight circles. Reliance Communications is in the middle of merging its telecom business with MTS and Aircel's remaining business. Plus, there is the baggage of servicing loans that companies such as Airtel took to buy companies abroad.

This is the fifth consecutive year the government is auctioning spectrum. In the 2015 auction, the sector was drained out after it made bids amounting to Rs 1.10 lakh crore. "The bidding in the 2010 auction and subsequent auctions were ferocious as the companies wanted to build a strong base. Last year's auction was about protecting the business as a lot of spectrum had come up for renewal [the companies had no choice]. This year, there's no urgent need for spectrum," says Shobhit Khare, Co-founder of investment advisory firm Inertia Wealth Creators LLP.

Also, the bidding will depend on the needs of operators. For instance, in 2012, 390 MHz spectrum was put up for auction, but the government was able to sell just 127.5 MHz. Similarly, in 2013, the government could sell only 30 MHz out of the 198.5 MHz that it put up for sale.

It is, of course, difficult to say how the companies will finally respond as most operators do not reveal their cards beforehand. Individual needs, too, differ. Bhupendra Tiwary, telecom analyst at ICICIdirect.com, says, "In a consolidated market, buying will be need-based. Some large players are expected to bid aggressively to fill 4G gaps while some will look for superior spectrum available at a low cost to increase coverage."

An investment banker for Vodafone India said the company would bid aggressively to fill gaps in its spectrum. Vodafone India has 4G spectrum in just nine circles (out of 22 circles). "Vodafone might become a pan-India 4G player," he said. Idea, with 4G spectrum in just 10 circles, is likely to follow suit.

"As no spectrum is up for renewal for Bharti, Vodafone and Idea, we do not expect them to bid aggressively. The upcoming auction is crucial for Idea and Vodafone as they have large 3G/4G gaps. Bharti and Jio have few circles without 3G/4G spectrum. They will try to bolster their data spectrum holding. We do not foresee meaningful participation from other smaller companies given their stretched balance sheets," says an August 9 report by Goldman Sachs. The report predicts that Idea will spend around $2.6 billion, followed by Vodafone ($1.5 billion), Bharti Airtel ($1.1 billion) and Reliance Jio ($0.3 billion). If this comes true, the companies are likely to add $5.5 billion (Rs 36,850 crore) to the government's kitty. These estimates, of course, vary widely. For instance, ratings agency CRISIL expects the companies to fork out Rs 1 lakh crore, while Deutsche Bank has pegged the figure up to Rs 12,500 crore.

Half-baked Measures

The steps to woo telecom companies may not be very effective. Take SUC. Every telecom operator is required to pay SUC to the government. It has varied from 3 per cent to 8 per cent of adjusted gross revenues in the past. The Department of Telecom has capped it at 3 per cent for future auctions. For existing spectrum, it will use a weighted average method to arrive at a figure. While this will not make any difference to telecom companies' SUC outgo immediately, the benefits will start flowing in the long term as their subscriber base expands. However, the move to reduce the interest rate for deferred payments will benefit the industry somewhat as most operators pay for spectrum in instalments. "The lowering of the rate is a function of falling interest rates," says ICICIdirect.com's Tiwary.

The government has also eased the rollout obligations. But most experts say there are enough instances of companies not meeting these obligations anyway. The most glaring example is RJio. It was awarded BWA spectrum in 2010, and as per the rules had to launch services by 2015. It has not been able to do so till date.

Maybe the government is waiting for a miracle this time.

 

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