Spectrum prices may be cut ahead of 5G auction, says CLSA

Bid will ease 5G rollout, increase telco debt

The government may cut the reserve price of spectrum ahead of the 5G auction, given 63 per cent of spectrum remained unsold at this week’s auction, CLSA said in its investor note.

The government had put 2,250 megahertz (MHZ) of spectrum on offer. After the two-day auction, it sold 855.6 MHZ. While the highest interest was seen in the 800-MHZ, 1,800-MHZ, and 2,300-MHZ segments, airwaves in 700 MHZ and 2,500 MHZ remained unsold.

While Reliance Jio bagged more than 50 per cent of the sold spectrum for ~57,122.65 crore, Airtel secured spectrum worth ~18,698.75 crore. Vodafone Idea (Vi) bought spectrum worth ~1,993.4 crore. “With 63 per cent of the spectrum in this auction unsold, there will likely be cuts in reserve prices. Historically, the government has cut spectrum prices by 30-40 per cent if it saw no demand in the previous auction and this will be a significant positive, especially for 5G. In future 5G auctions, with the 275-MHZ spectrum available in the 3.3-3.6-gigahertz bands alone (besides other bands) and only three operators, there will be good supply,” CLSA analyst Deepti Chaturvedi said in an investor note.

The acquisition of spectrum will enable Airtel and Jio to increase their network coverage and prepare the ground for the roll-out of 5G services. The spectrum purchase will, however, increase their debt.“the purchase of spectrum will further stretch the gearing of the telecom sector. Average debttoearnings before interest, tax, depreciation, and amortisation (Ebitda) ratio will increase 5.4x as on March 31, from CRISIL’S previous estimate of 4.4x. A higher leverage may, therefore, catalyse tariff hikes. It could necessitate 25-30per cent increase in tariffs for a sustainable return on capital employed of 8-10 per cent and for the debt-to-ebitda ratio to correct to 3.5-4x by the end of the next financial year,” said Nitesh Jain, director of CRISIL Ratings.

Auction spending will result in 144 per cent increase in Jio’s spectrum debt burden to ~63,100 crore and it is now around 10 per cent higher than Airtel’s spectrum debt of ~57,600. Despite its muted participation, Vi’s spectrum burden is still the highest among three operators at ~95,400 crore.

“The auction bid placements should further strengthen the two larger operators (Airtel and Jio), both of which remain well positioned to gain market share from Vi. With large investments in network, tariff hikes are inevitable,” said Kunal Vora of BNP Paribas in a note. However, opinion is divided over tariff hike. Analysts at Bofa Securities and Jefferies believe Airtel and Jio will focus on market share gains rather than hiking tariffs. “The initiative for tariff hike should largely come from Vi. Reliance management is unlikely to take a knee-jerk reaction of raising tariffs just because it spent more in the auctions,” said Bofa Securities.

Airtel and Jio are locked in fierce competition to increase their 4G customer base. Both the companies are also planning to launch 5G services. “With the aggressive spectrum acquisition, Jio seems to reduce gap with the incumbents. The interest in 2,300 MHZ spectrum can be attributable to the increasing popularity of the band for 5G deployment due to its better coverage. While it can be used to increase 4G capacity, it can also play a role in 5G deployment. Jio has made its intention clear stating that the acquired spectrum can be used for transition to 5G services at appropriate time where it has developed its own 5G stack,” Axis Capital said in its note.