India Ratings and Research (Ind-Ra) opines that the already high leverage levels of telecom companies and their existing capex priorities would constrain their participation in the 5G spectrum auctions, despite the low recommended reserve prices. The immature ecosystem for 5G does not make a strong business case for the spectrum purchase. The operators’ ability to re-farm existing spectrum holdings to 5G from 2G, 3G and 4G would be another factor affecting the relative levels of 5G spectrum’s supply and demand.
RJio Ahead of the Curve: Reliance Jio Infocomm Limited’s (‘IND AAA’/Stable) all-IP data network, along with the latest 4G LTE (Long-term evolution) technology, makes it future-ready, as it can support the 5G technology. Meanwhile, the parent company Reliance Industries Limited (‘IND AAA’/Stable) continues to provide tangible support to Reliance Jio for its debt servicing. Bharti Airtel Limited had a net debt/EBITDA ratio of 3.6x (on the trailing 12 months basis) in 1QFY19. Vodafone India Limited and Idea Cellular Limited on a combined basis had a pro forma net debt/EBITDA position of 10x in FYE18.
TRAI Recommends Wait and Watch: The timing of the 5G spectrum auction is not yet decided in the backdrop of telecom market undergoing major consolidation, which is necessitating a reassessment of spectrum needs. Telecom Regulatory Authority of India (TRAI) views that the spectrum auction should be postponed to 2019 when the 5G technology is likely to be available for commercial launch.
Abundant Supply & Lower Prices: 7,462MHz of the total spectrum is recommended to be put on the block, which is 3.2x of the supply offered for the auction in October 2016. The spectrum which is now proposed for auction is more than the total spectrum held by the industry, which will make its offtake difficult.. TRAI recommends that reserve price of 700MHz band should be equal to 2x of reserve price of 1,800MHz spectrum band (most popular LTE band). This is 42% lower than the price for 700Mhz in the earlier auction (INR114.8 billion/Mhz in October 2016). The price for 2,100Mhz airwaves is also 56% lower than the previous auction reserve price. TRAI recommends that reserve price of the 3,300-3,600MHz band should be equal to 30% of the reserve price of 1,800MHz FDD band.
Demand for 5G Spectrum: The 3,300-3,600Mhz bands of spectrum, also known as mid-bands, have been globally identified as primary bands for 5G and have already been assigned in a number of global markets. TRAI has released its recommendations for the 5G spectrum for the first time and offered 2,200MHz and 3,850MHz under the 3,300-3,600Mhz band. Still given the large quantity proposed to be auctioned and other constraints, the off-take could be uncertain.
No Roll-out Obligations for High Frequency Bands: Being a high frequency spectrum band, the 3,300-3,600MHz band is likely to be used mainly to enhance the network capacity of the underlying network set-up using lower frequency bands. Furthermore, this band is likely to be used for 5G and the telcos will decide 5G rollout based on demand and affordability. Moreover, 5G standards are still in development stage and the technology/device eco-system are evolving. Therefore, TRAI has not prescribed coverage related rollout obligations. However, to avoid any misuse of not mandating any rollout obligations, the lock-in period for spectrum in this band for becoming eligible for spectrum trading is recommended to be longer at five years instead of two years. Spectrum in the 3,300-3,600MHz band should be put to auction in the block size of 20MHz. To avoid monopolisation of this band, there is also a recommendation to cap 100MHz/bidder as the maximum bidding limit.
Valuation and Reserve Price of Spectrum: There is no historic data available for the 700MHz band which was offered in the 2016 spectrum auctions but remained unsold, and for the new 3,300-3,400MHz/3,400-3,600MHz specific bands which are on offer for the first time. Therefore, TRAI has relied upon market discovered prices of a comparable spectrum band and applied a technical efficiency factor to arrive at the valuation of the spectrum bands being put to auction for the first time. The 700MHz spectrum band is regarded as both CAPEX and OPEX efficient for LTE (long-term evolution) networks in comparison to deployment for higher spectrum bands.
Valuation of 1,800MHz/800MHz/900MHz/2,100Mhz Spectrum: TRAI recommends that the average expected valuation of spectrum band should be the higher of the average expected valuation of that band based on simple mean or the auction determined price of October 2016 (duly indexed). In circles where no spectrum was offered in October 2016 auctions, reserve price should be 80% of average valuation. – CT Bureau