Spectrum auction: Aggressive bidding might happen for select circles

BANGALORE, INDIA: The spectrum auction today is likely to see intense bidding by exisiting telcos along with the new entrant, Reliance Jio.

According to Fitch Ratings estimates, telcos are likely to commit at least USD13bn in the auctions - over 75% of which is likely to be contributed by the top-four telcos. The top telcos(Bharti Airtel, Vodafone India and Idea Cellular) could commit around USD2.5bn-4.5bn each to renew their expiring spectrum in six, seven and nine Indian "circles" (i.e. regions), respectively. They are also likely to acquire additional spectrum to support fast-growing data services.

Here's what Fitch expects it to be:

Eight operators are likely to bid for a total of 465MHz of spectrum across four bands - 800MHz, 900MHz, 1,800MHz and 2,100MHz - where each band is valid for 20 years.

Telcos whose 900MHz spectrum is expiring will prefer to retain this bandwidth, as having to switch frequencies could require significant capex and disruption of the already-established network.

"Bidding is likely to be most intense for the 900MHz band, which can be used for both 2G and 3G, as signals can travel further and provide better indoor coverage than higher frequencies. We believe that the 900MHz auction price could rise at least 20% higher than the reserve price," said Fitch Ratings.

"Reliance Jio could push up the spectrum price in 900MHz for other telcos, if it chooses to do so, as the auction mechanism hides the identities of participants."

Idea is most exposed to the auctions as it needs to retain its expiring spectrum in circles which contribute around 70% of its annual revenue. Such revenue contributes 45% and 35% of annual Indian revenue for Vodafone and Bharti, respectively.

Reliance Communications Limited will be the least affected of the top four, as Fitch believes it is likely to commit a maximum of USD667m in seven circles, where we expect competition for spectrum will be lower. Rcom's management expects this cost to be lower.

Reliance Jio (part of Reliance Industries Ltd) which plans to roll out its services in 2015 with an investment budget of USD12bn, is likely to fill its spectrum gaps in the 1,800MHz band. We feel it will probably focus on data services using LTE technology, with its ownership of 1,800MHz spectrum in 14 circles and a pan-India spectrum in 2,300MHz.

CyberMedia Research(CMR) anticipates that the bidding could get aggressive in few select circles, as most of the service providers will be focusing on bidding of spectrum to supplement their current spectrum and to hold on to their respective leading markets, which would be essentially to support their current voice and data traffic.

Thomas George, SVP & Head, CyberMedia Research(CMR) said, "Many incumbents had already acquired adequate spectrum in 1800 MHz band in their respectively circles, during their last auction outing, plus there is also large availability of 800 MHz spectrum."

An aggressive bidding in the circles like Maharashtra and Gujarat is anticipated, which are high potential markets mainly for the reason that the the incumbents in these markets will currently have low incremental spectrum on offer. We can expect a good auction for Gujarat circle as incumbents will try to acquire additional spectrum to maintain their position and to stay competitive in future, while aspirants in this circle might like to extend their 3G services and they will come to the auction with an intention to win.

Some amount of action might be seen in few circles like Bihar and Kerala also as few challengers in these circle don’t have 3G spectrum added with low level of incremental spectrum on offer in those circles.

This auction will create a large amount of debt for all participating service providers. But these capex and spectrum payment burden is lightened by government’s deferred payment method with 25pc upfront payment of their bid value, with two year moratorium followed by 10 equated annual payments. It will ease the burden to some extent for these players and help them to streamline their annual payouts out of their cash flows.

While all the incumbent service providers would like government to auction a block of 2100 MHz band 3G spectrum for all circles, which would help them to expand their 3G footprint across the nation, but operators with better cash flow will have a strategic advantage over the other competing players and right cushion to wade through this auction and grow in their respective markets.