Motilal Oswal Institutional Equities has revealed its views on the spectrum auction in India that has generated INR 778 billion vs its expectation of INR 450 billion from the sale of 855.6 MHz of spectrum for the government.
The sale of ~37 percent of the total 2,308.8MHz put up for auction is ~60 percent higher than the renewal spectrum requirement across telcos.
This was led by Reliance Jio / Bharti Airtel, which bought bulk of the spectrum – 488.35 / 355.45MHz – for INR 571 billion / INR 187 billion, i.e. 44 percent / 104 percent higher than that required for renewal. Vi (Vodafone Idea) response was muted. Vi bought spectrum worth INR 20 billion in just five circles (76 percent lower than that required for renewal).
The widespread acquisition by Jio / Airtel can be explained by: a) renewal of existing spectrum, b) investment in lower bands to deepen coverage, and c) investment in capacity bands (2,300MHz) to debottleneck networks and prepare for a seamless switch to 5G in the future.
The government will receive ~INR 270 billion upfront (Jio / Airtel to pay INR 199 billion / INR 70 billion) and the rest after a two-year moratorium.
Bharti Airtel’s in the last 12 months, with continued market share gains, gives us confidence that irrespective of a higher-than-expected Capex and delayed price increase, it can deliver 18-20 percent EBITDA CAGR over the next three years, garnering 7-8 percent FCF generation, led by higher incremental 4G share.
Jio has further strengthened its capabilities. Being the leader, it should benefit as better tariff rates prevail.
Vi’s low participation is evident from its weak liquidity. Its huge debt leaves limited options.
In the CY16 auctions, 41 percent / 12 percent of spectrum was sold by quantity/value to seven bidders, while in this auction 37 percent / 19 percent was sold to just three participants.
SUC will be chargeable at 3 percent of AGR, excluding revenue from wireline services.
Sub-GHz spectrum generated huge interest
In line with expectation, the 800MHz band generated the highest interest, with spectrum acquisition of INR375b. This was due to renewal of RJio’s existing spectrum in this band in 19 circles. Jio acquired 133.75 MHz vs expiring spectrum of 115MHz. It renewed higher spectrum in most metro and A circles (Delhi, Mumbai, Maharashtra, Kerala, Karnataka, Kolkata, Tamil Nadu, and West Bengal), while some circles witnessed lesser interest (Gujarat, Punjab, UP East, and UP West).
Bharti showed interest in sub-GHz spectrum – 800MHz and 900MHz – in line with the management’s guidance. It purchased 16.25MHz spectrum worth INR30b in four circles – Haryana, MP, Maharashtra and UP West – in the 800MHz band.
Airtel acquired 32.6MHz spectrum across nine circles in the 900MHz band for INR65b. With this, Bharti has established its nationwide coverage using the subGHz band, in line with its strategy.
Vi acquired 5.8MHz in the 900MHz band.
Mid-band raked in over INR 180 billion
The 1,800MHz band generated significant interest with the acquisition of over 152.2MHz. The higher interest was due to expiring spectrum of both Airtel / Vi and increased interest of Jio. Airtel / Jio / Vi acquired 71.6/74.6/6MHz.
Airtel purchased spectrum worth INR58 billion (vs INR130 billion required for renewal of spectrum in this band), while Jio spent INR125 billion. The difference in the amount paid, despite the similar quantity, can be attributed to the higher interest of Jio in metro/Tier I circles like Delhi, Mumbai, Maharashtra, and Gujarat. Jio bought spectrum worth INR69b in these circles – higher than Bharti’s total purchase.
Airtel has shown restraint where it has sufficient liberalized spectrum available. Airtel did not acquire its expiring spectrum in Gujarat, Haryana, Mumbai, and Maharashtra circles and acquired a lower amount in Kerala, MP, and UP West as it had purchased spectrum in other bands for these circles, except Mumbai where it did not buy any spectrum. Only in Tamil Nadu, Airtel acquired a higher quantity than the expiring spectrum.
In the 2,100MHz band, Airtel acquired 15MHz across three circles (Assam, North East, and West Bengal) spending INR 3.6 billion.
About 90 percent of the auctioned capacity sold out
The 2,300MHz band generated substantial interest, with demand touching ~90 percent of the auctioned spectrum. The high interest in this band can be explained by: a) need for capacity spectrum as cell site density is at optimum levels for Jio / Airtel, while data growth continues at an exponential pace, b) Bharti/RJio has a presence in this band, unlike sub-GHz, which is split between 900MHz and 800MHz, c) seamless capability of re-farmed 2,300MHz to 5G, particularly in metros and Tier I circles, which would be the earlier movers to 5G.
Airtel / Jio bought 220MHz / 280MHz of spectrum worth INR 30.7 billion / INR 101.7 billion. The difference in the amount paid is due to Jio’s focus on metro/Tier 1 circles like Delhi, Mumbai, Andhra Pradesh, Karnataka, and Tamil Nadu, where Bharti did not acquire spectrum.
Overall spectrum holding of players
At the end of the spectrum auction, Bharti holds 27.5/149/303.85/185/790MHz in the 800/900/1,800/2,100/2,300MHz band.
Jio holds 148.75MHz in the 800MHz band (16 percent lower than Bharti’s sub-GHz holdings), 221MHz in 1,800MHz (v/s Bharti’s 303.85MHz), and 880MHz in 2,300MHz (v/s Bharti’s 790MHz).
Vi holds 141.2/355.9/30/195/370MHz in the 900/1,800/2,300/2,100/2,500MHz band.
Valuation and view
Airtel spent INR187 billion at the auction vs INR130 billion required for renewal of spectrum. This would increase its spectrum Capex by 44 percent in FY22E and would reduce its FCF to INR12.6b in FY22E vs INR75b earlier. Its net debt would increase to INR1,661 billion from INR1,474 billion at present (including lease liabilities).
Jio spent INR571 billion at the auction vs INR280 billion required for renewal of spectrum. This would increase its spectrum capex by 103 percent in FY22E and would reduce its FCF to -INR420b in FY22E vs -INR133 billion earlier. Its net debt would increase to INR476b in FY22E v/s current expectations of INR189b.
Vi spent INR20 billion at the auction vs INR86 billion required for renewal of spectrum (i.e. 76 percent lower than the renewal amount), given its weak liquidity position. The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the higher operating leverage opportunity from any source of ARPU increase.