Healthy participation in 5G spectrum auctions

The recently concluded 5G auctions witnessed healthy participation, with the industry spending the highest-ever amount in one auction. With a total spend of around ₹150,170 crore, the industry purchased the spectrum for 20 years across 3300MHz, 26GHz, 700MHz, and 1800MHz bands, along with small purchases in 800MHz, 900MHz, 2100MHz, and 2500MHz bands, while there was no participation in the 600MHz and 2300MHz bands. Of the total spectrum of 72,098 MHz put to auctions, around 71 percent of the spectrum was sold; however, in value terms this was only about 35 percent of the total value of the spectrum at reserve price. While the 3300MHz and 26GHz bands will be crucial for 5G technology deployment going forward, the appetite for 1800MHz band stems from the rising mobile broadband usage and thus the need for improving network capacity. Further, the 700MHz band, which went unsold in the last two auctions, witnessed participation, wherein Reliance Jio (RJIL) bought 10 MHz across all 22 circles.

RJIL was the most aggressive bidder, acquiring spectrum worth more than ₹88,078 crore, followed by Bharti Airtel (BAL) at ₹43,084 crore, Vodafone Idea (VIL) at around ₹18,799 crore, and Adani Data Networks at ₹212 crore. The spectrum auction participation exceeded ICRA’s estimates and fetched the exchequer around ₹150,173 crore, of which around ₹13,400 crore is to be paid upfront as the first instalment. This amount will be in the form of a 20-year deferred spectrum debt at a 7.2-percent interest rate, which eases the repayment burden for the industry for this auction and forms a primary reason for healthy participation in this auction. Against payment terms of 25 percent to 50 percent upfront payments as per bands in the previous auctions, this payment plan is relaxed and avoids any dent on the liquidity position of the industry. Further, spectrum availability was abundant as indicated by the fact that apart from UP East in 1800MHz band, the spectrum in other circles was sold at a reserve price only.

In terms of spectrum bands, while 700MHz band remains the most expensive, it has better indoor propagation characteristics. Thus, there has been a divide in terms of strategies of different telcos as far as this band was concerned and thus, 700MHz band witnessed participation by only one telco. ICRA expects that a healthy mix of spectrum bands – sub-GHz, mid bands, C-band, and mmWave band, can deliver a good mix of benefits in terms of optimum spectrum-acquisition costs, network deployment and maintenance costs, along with network coverage.

The 5G rollout will require a sizeable degree of fiberization as India currently has around 30–35 percent of its towers fiberized. However, ICRA expects that the telecom operators are not likely to carpet-bomb the roll-out across the country, and it will be more pocket-specific to areas that are likely to give healthy returns. Thus, along with relaxed payment terms of the auctions, the CapEx for the roll-out is also likely to be phased out, thereby easing the cash-flow pressures on the industry.

Furthermore, since a lot of use-cases are under development, it will take some time for 5G to reach adequate levels of penetration, and to begin with, it will be more focused toward enterprise-based use cases. Also, for roll-outs, small cells, and in-building solutions, along with dense network of fiberized towers, it will aid in a robust network.

Post the auctions, the debt levels of the industry would increase further to around ₹6 lakh crore as on March 31, 2023, with the addition of the deferred spectrum liabilities. Of this debt, around ₹4.1 lakh crore is expected to be on account of the deferred spectrum liability, while another ₹0.7 lakh crore will be as lease liability and external debt is projected to be around ₹1.2 lakh crore. The government is likely to collect ₹13,400 crore for FY2023 from these auctions, with similar annual payments going forward.

For all the auctions taken together, the annual payments are likely to be ₹19,600 crore for FY2024 and FY2025 each, before increasing to more than ₹50,000 crore from FY2026 onwards as the moratorium ends. For FY2022, the collections are expected to be around ₹85,500 crore, higher than the revised estimate of ₹71,959 crore, as some of the telcos prepaid a part of their spectrum liabilities.

For FY2023, the government’s collections from telecom are likely to be around ₹45,000 crore, including spectrum collections and other statutory collections, against budgetary estimates of around ₹52,800 crore. Going forward, the collections are expected to increase slightly over FY2023 levels, with auction instalments and the likely increase in license fee with the growth in revenues, even as the recently concluded spectrum auctions had no spectrum-usage charges.

The telecom industry has been witnessing green shoots of recovery. The tariff hikes implemented by the industry participants, coupled with consistent upgradation of subscribers to 4G from 2G and increase in usage of telephony services, are expected to result in improvement in industry’s ARPU (excluding BSNL) to around ₹170 for FY2023, translating into growth in industry’s operating income by around 10–12 percent and OPBDITA by around 18–20 percent in FY2023.

Industry’s consolidated revenues are expected to be around ₹2.6–2.7 lakh crore with OPBDITA of around ₹1.2–1.3 lakh crore for FY2023. These are likely to translate into a ROCE of around 8–9 percent for FY2023 for the industry.

While the debt levels remained unwieldy, exerting pressure on the debt-coverage metrics, ICRA expects the debt metrics to improve steadily, going forward, given its expectations of improved profit generation.

The industry total debt/OPBDITA is expected to increase to 4.7x for FY2023, with the addition of deferred spectrum liabilities, before moderating to 4.2x by FY2024. The interest coverage is likely to remain at around 2.5x for FY2023 and is likely to improve to 2.7x for FY2024.

Telcos have been focusing on deleveraging – Bharti Airtel Limited concluded its rights issue of ₹21,000 crore and collected 25 percent as upfront payment, while Vodafone Idea is also scouting for a fund raiser.

While in the core business, technology upgrade to 5G is likely to drive the growth going forward, along with the upgradation of a large pool of subscribers to higher technology, the non-telco businesses – which include enterprise business, cloud services, digital services, and fixed broadband services – will also remain crucial for chartering a growth path for the industry.

Currently, the telcos have a portion of revenues coming from non-telco business, viz., enterprise business, home broadband, etc., which is likely to expand with the addition/expansion of domains like adtech, payments banks, data centers, etc.