Feb auctions for spectrum unlikely to flop, but dont expect a fierce fight

Written by Jayati Ghose | New Delhi | Updated: Jan 28 2014, 06:41am hrs
SpectrumSpectrum in Mumbai and Delhi is expensive so analysts do not expect new operators to bid for it.
Though the forthcoming spectrum auctions for 1,800- and 900-MHz bands starting from February 3 are expected to be successful, unlike the previous two (November 2012 and March 2013) that flopped, it is certaintly not going to be like the 2010 3G auctions that saw very aggressive bidding by operators.

As the quantum of spectrum being put up for bids this time is more than the earlier auctions and the reserve price is also lower, there isn't a supply-demand mismatch, which existed during the time of 3G auctions, and artificial scarcity that was created in November 2012 and March 2013, along with high reserve price.

For instance, the reserve price of the forthcoming auction is around 51% lower than the November 2012 one and 47% lower compared to the 3G auction discovered price.

The quantum of spectrum in 1,800-MHz paired band to be auctioned is 403.2 MHz, i.e., almost 18 MHz per circle against 355 MHz in the 3G auction and 295 MHz in the November 2012 auction.

Moreover, with additional 3G and 4G spectrum (used to provide high-speed data service) expected to be released in the future, the fear of spectrum being scarce no longer exists, according to Morgan Stanley analysts Vinay Jaising, Amruta Pabalkar and Vanessa DSouza. This scenario did not exist in 2010 when the government earned over Rs 1 lakh crore from sale of 3G and 4G radiowaves.

Analyst estimate that the February auction is likely to fetch the government exchequer around Rs 57,500 crore, when the entire spectrum put for sale is lapped up, as operators have understood that investors tend to penalise irrational bidding.

The 3G auction in April 2010 led to aggressive bidding with spectrum being sold at almost 4x the reserve price. In the six months prior to the auction, telco stocks underperformed MSCI India by 30%; and net debt expanded for companies with operators investing 15-25% of their capital, depressing the return on capital employed (ROCE). Foreign institutional ownership reduced in the auction, said the Morgan Stanley report.

However, during the 2G auction in November 2012, which did not find any takers for four circles, FII ownership that had reduced pre-auction finally started increasing after auction due to operators becoming a lot more rational.

Another factor that will dissuade aggressive bidding is that the price discovered in this sale process will be used as the base price when mobile permits of companies come up for renewal from 2015 onwards. Put simply, aggressive bidding in February will translate into higher costs for renewing licences across the country next year onwards.

"Bidding is unlikely to be aggressive despite limited availability of contiguous spectrum as the price discovered will be used for incumbents renewals. This should ensure rational behaviour from their side," wrote Gaurav Malhotra, Arthur Pineda and Jitender Tokas in a Citi Research report.

Analysts also said that concerns surrounding Reliance Jio's entry into the 2G auction leading to irrational bidding are unfounded. Based on discussions with various telecom analysts, from a 4G rollout perspective, a 900-MHz spectrum would not make economic business case as the LTE ecosystem on 900 MHz is not mature. However, the 1,800-MHz LTE ecosystem is mature and could be used for 4G deployment.

"We believe that (between 900 MHz and 1,800 MHz) R-Jio could be better placed if it acquires the 1,800-MHz spectrum. However, in our view, the best spectrum combination for R-Jio is 700 MHz/2,300 MHz as the 700-MHz ecosystem is mature, unlike 900; and 700 MHz helps in indoor coverage, unlike 1,800," said Sachin Salgaonkar in a Goldman Sachs report.

In 900 MHz, however, incumbents whose licences are expiring in 2014 could be aggressive bidders. These include Bharti Airtel, Vodafone and Idea. They could bid for at least 5 MHz in 900 MHz in those circles and the balance could reallocate to 1,800 MHz. Spectrum in Mumbai and Delhi is expensive so analysts do not expect new operators to bid for it.