The auctions for 3G and the Broadband Wireless Access (BWA) spectrum started on 9 April 2010 and we look at the implications for Indian telcos and the likely bidding behaviour. We maintain our view that prices discovered from the auctions are likely to surprise on the upside.
We believe the likely cash outflow for pan-India 3G and BWA spectrum to be ~US $2 billion and ~US $750 million-1 billion, respectively. We expect fierce bidding, given that only three slots are available for 3G and two slots for BWA in most circles. We expect incumbents Bharti, RCOM and Vodafone to bid aggressively for pan-India 3G, Idea to bid aggressively in about 12-15 circles and Aircel to bid most aggressively in existing 2G strongholds numbering about 5-6 circles. Tata Teleservices (Not listed) is also likely to bid aggressively for 3G spectrum in about 15-16 circles, where they have already established a 2G GSM presence.
Auction guidelines validate our negative investment thesis on MTNL as it outlines that MTNL needs to match the highest bid price in Delhi and Mumbai.
We note Bharti?s balance sheet will be the most stretched in the sector (FY11E Net Debt/Equity of 1.4x and Net debt/EBITDA of 2.8x) post 3G auctions, assuming that the Zain Africa acquisition goes through, post regulatory approvals.
We reiterate Underweight on India Telcos on bleak growth outlook and premium valuations. We expect wireless KPIs for listed telcos to continue to deteriorate for the next two quarters; we see downside risks to consensus estimates for FY3/11E. Indian telcos trade at a significant premium to the region on EV/EBITDA with comparable growth and lower dividend yields-Bharti at 7x, Idea 5.8x, and RCOM 5.9x FY3/11E vs the Asia telcos average of 4.3x. We expect this premium to narrow as India?s growth premium subsides.
Six of the nine initial bidders, Bharti, Idea, RCOM, Vodafone, Tata Teleservices and Aircel, have been confirmed as having applied for the pan-India 3G licence. New operators like STel have stated their intention to bid for specific circles. This makes for fierce bidding especially for Metro and Category A circles. The base reserve price for the Pan-India 3G licence is Rs 35 billion (US $760 million). BWA too is seeing keen interest by players like TCOM, Qualcomm and RCOM. Bidding also should be competitive with only two slots available for auction. The base reserve price for Pan-India BWA licence is RS17.5 billion (US $380 million).
The likelihood of irrational bidding remains a key overhang for the sector with its potential to stretch balance sheets. We expect Bharti and RCOM to spend US $2 billion on the pan-India 3G licence and US $750 million-1billion on the pan-India BWA licence each. Idea is likely to see a US $1.5 billion cash outflow on account of the 3G licence in 15-16 circles.
Most of the 3G spectrum to be allocated will be utilised for augmenting existing capacity to carry voice traffic. Post launch of GSM networks by Tata Tele and RCOM, there is overcapacity at an industry level but at the individual company level, particularly Bharti, Vodafone and Idea, networks are rapidly reaching capacity limits. Because of this, the need for additional spectrum is the highest for Bharti, Vodafone and Idea-for Vodafone and Idea in their 16 and 11 incumbency circles, respectively. Hence, these three operators should be ready to pay a premium price for spectrum, thus driving bids higher.
Spectrum being auctioned for BWA now is on 2,300 MHz band, designed for TD-LTE rollouts, making spectrum fungible between 3G and BWA services over a 3-5 year time frame. Thus, bidding on BWA right now is a way for telcos to ensure spectrum availability for future growth when 4G technology, namely LTE becomes more commercially viable and gets widely deployed, potentially in the 2013-15 time frame. This should make for fierce bidding in this round of auctions for BWA spectrum as well, given the paltry amount of 5MHz of spectrum being auctioned in 3G grade (2,100 MHz band).
