India's telcos may not bid aggressively at 5G auctions

Indian telcos are likely to pick up 5G airwaves at reserve prices brokerage houses tracking the auctions said, as they do not expect them to go into a bidding war since surplus spectrum has been made available. Bharti Airtel and Reliance Jio may well take pan-India spectrum, Vodafone Idea may take only a few circles given its weak financial position, they said, while red flagging captive 5G networks as the key cause of concern. 

“More than adequate spectrum is available for the three operators and hence we don’t expect a bidding war in the auction,” said analysts at JP Morgan in a note to clients on Thursday seen by Mint. In the 3300-3650MHz spectrum band, 330 Mhz of airwaves is available in every circle as per the notice inviting applications issued by the department of telecommunications. An operator requires only 100Mhz for pan India roll out. 

“We note that despite reserving 40MHz in the 3,300MHz band for public sector telcos, there is adequate spectrum for the three operators, as the spectrum cap is set at 40% (or 130MHz), which would limit the scope for aggressive bidding, in our view,” said analysts at Nomura Global Markets Research in a note a day after the government announced 5G auctions that will begin on July 26. 

Sector watchers questioned participation of Vodafone Idea given its stretched balance sheet and elusive equity fund raise, but said that Bharti Airtel and Reliance Jio were likely to participate with annual payment of about Rs 2,840 crore including interest estimated to go to the government for pan-India 5G spectrum purchases. 

“Despite no upfront payment requirements, we remain skeptical of Vodafone Idea ability to meaningfully participate in the auctions as it would require immediate servicing (unlike about 3.5 years of moratorium on the entire existing spectrum debt), which would be difficult given its stretched balance sheet and elusive equity fund raise,” said analysts at Credit Suisse in note to clients seen by Mint. 

“We believe Vi (IDEA IN, Reduce) could restrict its bid for 5G spectrum to select circles, given its capex constraints, much delayed fund-raising and existing gaps in 4G coverage,” analysts at Nomura noted. 

The Swiss brokerage house said in the note that while Airtel and Reliance Jio were well positioned to participate in the upcoming 5G auctions, Airtel remained the key beneficiary of the ARPU improvement, improved regulatory environment and organic market share gains. Another upside will come from scrapping of spectrum usage charges which will significantly reduce the acquisition cost of fresh spectrum. 

“We expect Bharti and Jio to participate in the auctions but note that telcos may be selective on the quantum this time given the likely demand-supply imbalance and annual auctions,” analysts at JP Morgan said in the note quoted earlier. 

The annual cash outflow is estimated to be Rs2840 crore for each telco over 20 years which will impact the EBIDTA for Vodafone Idea the most and Bharti Airtel the least over the ongoing and the next two financial years, that is till March 2025. To mitigate the impact, ARPUs would have to be increased by 6% for Vodafone Idea and 3% for Reliance Jio and Airtel, they added. For the quarter ended March 2022, Airtel had an ARPU of Rs 178, followed by Jio at Rs 168 and Vodafone Idea at Rs 124. 

Analysts however cautioned that telcos have usually bid more than expected so an upcycle in telco capex over FY24-25 could follow from substantial bidding in these auctions and is therefore a risk. 

But the key issue will remain captive 5G networks as they may pose a threat to the carriers‘ enterprise revenue pipeline given that most use cases will be enterprise driven. The government is yet to come up with the modalities, pricing, of direct spectrum allotment to enterprises. All three telcos had publicly expressed strong views against direct spectrum allotment for captive private 5G networks. 

“Enterprises being permitted to directly obtain spectrum to set up captive non-public networks is a more concerning situation given that the 5G opportunity is a play on enterprise solutions rather than retail consumers,” said analysts from Kotak Institutional Equities in a note to clients on Thursday. 

Credit Suisse further cautioned that private networks could be negative for telcos’s future 5G monetisation from enterprises even as its use cases are still being developed. 

However, some said that the concern was not well founded and that telcos will benefit from providing 5G solutions to medium scale enterprises. “We believe, large enterprises will accelerate private network ecosystem and aid telcos’ enterprise business growth,” said Sanjesh Jain, ICICI Securities. 

“Large enterprises establishing isolated network (by obtaining spectrum directly) will accelerate ecosystem and use-cases for captive non-public networks, and help telcos develop new market for medium-sized enterprises, in our view,” he added.