Spectrum bidding to add to debt burden of telcos; tariffs may rise

The stakes have never been higher. Telecom operators' bids for spectrum have crossed Rs 1 lakh crore in a matter of 10 days. The bidding was expected to be aggressive. After all, telcos are in the fray to primarily retain the spectrum they already use in different circles. Losing airwaves in service areas where they have a large 2G and 3G consumer base will cost the operators heavily - they will have to exit and sell infrastructure worth about Rs 3,000 crore in each area.

Indeed, the whole telecom business is going to change in India after the auction. First, there would be a rise in tariffs without new services on offer. Then, the smaller telcos will have to find a new business model, developing pockets of margins or surrendering spectrum to consolidate. Sivarama Krishnan, Executive Director at PricewaterhouseCoopers, says that the entry of a strong nationwide fourth operator (Mukesh Ambani-controlled Reliance Jio Infocomm) has made the auction highly competitive. "Retaining the spectrum has turned expensive," he says.

The biggest-ever auction of spectrum - across 800, 900, 1,800 and 2,100 MHz bands - started on March 4. The government had estimated Rs 80,000 crore to Rs 1 lakh crore from the sale. The GSM frequency bands, 900 MHz and 1800 MHz, are the most sought after, followed by the CDMA frequency band of 800 MHz. Bids for telecom spectrum rose marginally to Rs 1,02,215 crore at the end of the tenth day of the auction. According to the Department of Telecom, about 87 per cent of the spectrum has been provisionally allocated to bidders at the end of round 61.

(*Update: Spectrum auction ends, bids cross Rs 1 trillion-mark)

The licences of Idea Cellular (nine circles), Bharti Airtel (six circles) and Vodafone and Anil Ambani's Reliance Communications (seven circles each) in 18 service areas are due for renewal this time (the country is divided into 22 circles). But more than anyone else, this auction is crucial for Aditya Birla group's Idea - the company's 900 MHz spectrum in nine circles accounts for a whopping 72 per cent of its revenue. Also, it doesn't have back-up spectrum of 1800 MHz. Airtel had bought back-up air waves (1800 MHz in addition to 900 MHz) during the last round of auction to reduce risk.

Idea generates almost 100 per cent of its EBITDA (earnings before interest, taxes, depreciation, and amortisation) from the nine circles under auction, say analysts. "The telcos design their networks according to the spectrum. If anyone loses their existing spectrum in a circle, they will have to create new infrastructure according to the new band, which is highly capital intensive," says Shobhit Khare, telecom analyst at Motilal Oswal Securities. For instance, in the 900 MHz band, an operator needs 485 towers to cover 1,000 square kilometre while it requires 777 towers in 1800 MHz to cover the same area. "The rural areas are large, where coverage will drastically drop with this change," adds Khare.

The primary concern for telcos is their mounting debt, and soaring spectrum costs will add to their woes. Consider this. Airtel, the largest player, had a consolidated debt of Rs 60,542 crore at the end of 2013/14, primarily because of its $10 billion acquisition of Zain Africa. Reliance Communications (RCom) had Rs 41,978 crore debt on its books at the end of the last financial year while Idea Cellular and Vodafone India (standalone) had around Rs 20,000 crore each. In fact, RCom's total income (Rs 25,346 crore) was lower than its debt.

HSBC Securities analysts expect Idea and Airtel to have a budget of Rs 22,000 crore for the auctions. Vodafone's budget will be Rs 24,000 crore and RCom's Rs 6,000 crore, estimates the brokerage. It expects Idea to spend up to Rs 18,000 crore on 900 MHz renewals and Rs 4,000 crore for adding 3G airwaves in key markets. Sunil Mittal-led Airtel may spend Rs 10,000 crore each on 900 MHz renewals and expanding 3G spectrum coverage in Gujarat, Maharashtra, Madhya Pradesh and Delhi. HSBC also expects the operator to set aside an extra Rs 2,000 crore for acquiring 2G spectrum in the 1800 MHz band. India's second-largest mobile carrier Vodafone could spend as much as Rs 12,500 crore on 900 MHz renewals and up to Rs 12,000 crore on 3G airwaves, says the brokerage. RCom may end up "significantly overpaying" for renewing 900 MHz spectrum in existing markets, it adds.

The telcos who retain the spectrum will have to pay 25 or 30 per cent (it is different for different bands) of the bidding amount upfront, while the remainder will be deferred payment spread across 10 years, after a two-year moratorium. But since they plan to make the initial payment through loans, the debt levels will rise and servicing it will become tough. In such a scenario, the companies will see only limited capital for expanding their services.

Morgan Stanley recently said in a note that operators would need a 15 per cent hike in tariffs to neutralise the adverse impact of auctions on profits. But it believes that retaining spectrum is positive in the long run. "The spectrum is valid for 20 years and hence, there is a lot more certainty from a business continuity perspective. Data growth is happening at a robust pace, which should aid overall revenue growth for the operators," the note said.

The medium-to long-term outlook, then, appears reassuring for telcos.

(*The story appeared in the April 12, 2015 issue of Business Today, which was published before the telecom spectrum auction ended on the evening of March 25, 2015)