India Ratings Expects Top Telcos to Continue to Bid Aggressively

Mumbai, March 11, 2015: India Ratings & Research (Ind-Ra) expects top telcos (Airtel, Vodafone, Idea and Reliance Communications), whose licences are set to expire in 2015-2016, to continue bidding aggressively during the on-going spectrum auction. The auction is crucial for these operators as they might have to give up some of their existing operations in profitable areas if they are unable to acquire the desired spectrum. 

 

The scarcity of spectrum across all bands and the cabinet’s decision to keep the base price at a premium of 17% to 36% over the Telecom Regulatory Authority of India’s (TRAI) recommendations, have also added to the pricing pressures. 

 

The spectrum which has been put up for auction is completely ‘liberalised’, which means that there is no restriction on the technology that telecos can adopt to provide services using the spectrum blocks allocated through this auction. Contiguity of the spectrum being offered thus becomes more crucial in a technology neutral environment as contiguous bands can be used to deploy higher technology e.g. 3G services over a 900MHz band and 4G services over an 800MHz band. 

 

The deployment of 3G services on the 900MHz band provides better indoor reach while cutting costs up to 50%-70% for both capex and opex. As the proposed base price is comparable for both the 900MHz and 2100MHz bands, Ind-Ra believes that demand for the contiguous 900MHz spectrum is bound to be highly competitive for the above reasons. 

 

Reliance Jio, which already has pan-India 4G capable bands, has already submitted the highest earnest money deposit displaying a determination to bid for a large quantum of the spectrum blocks. We believe that RJio is targeting a pan-India 3G presence, to diversify from the current data-only strategy, by acquiring a combination of 900MHz and 2100MHz bands put to auction across LSAs. This is bound to increase competition especially in the scarce 900MHz band where existing operators will fight it out to safeguard their existing operations. 

 

Ind-Ra believes that India’s low internet reach (27.5% of telecom subscribers) and increasing acceptance of ecommerce and social media shall drive a surge in data consumption. Ind-Ra therefore expects operators to place competitive bids to enhance their data capabilities either through 3G or 4G services keeping in mind that the spectrum being auctioned is here to stay for the next 20 years. 

 

As a result of spectrum scarcity, technology liberalisation, advantages of contiguity and RJio’s interest in pan-India voice telephony Ind-Ra expects the aggressive bidding to push up spectrum prices. Telcos are already struggling with limited opportunities to expand margins further as voice revenues have matured and there is possibility of stress on data tariffs once RJio enters the fray. Higher spectrum prices will largely be debt funded and shall increase leverage and impact the credit profiles of large telcos.

(Source: Senior Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company, Mumbai.)