Industry To Avoid Aggressive Participation In 5G Spectrum Auctions

Posted by ICRA

The Indian telecom industry continues to face headwinds in terms of revenue generation and profitability, although a slow recovery is on the anvil. Tepid cash-flow generation against elevated debt levels have been a concern for the industry for some years and recent fund raising by the telcos have assuaged these only temporarily. Given this environment, 5G spectrum auctions along with the network capex required for 5G will likely exert further pressure on the industry and the same has the potential to disrupt the recovery process. Moreover, lack of established content and use cases, as well as uncertainty around the capability of Indian subscribers to pay a premium for such services, further strengthens the case for telcos to avoid aggressive participation in 5G auctions at this juncture.

Explaining this further, Ankit Jain, Assistant Vice President – Corporate Ratings, ICRA, says, “The trends of last few months indicate green shoots for the industry in the form of ARPU stabilization, however pricing recovery is expected to remain modest in the near term. Further, FY2020 has witnessed some degree of deleveraging and some of the plans are on the anvil, which is expected to result in reduction in debt from Rs. 4.75 lakh crore as of March 2019 to Rs. 4.0 lakh crore as of March 2020. However, this is only temporary relief without a firm visibility on cashflow recovery. Anyway, the debt coverage indicators continue to remain weak. In such a scenario, 5G spectrum purchase at high prices, followed by capex for network rollout will add to the challenges of the industry.”

The TRAI had come up with its recommendations for the auction of more than 8000 MHz of spectrum across all the existing bands, namely, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz, along with the 700 MHz band, which went unsold in the October 2016 auctions and a new band, namely, 3300-3600 MHz. At reserve price, the valuation of the spectrum is Rs. 4.93 lakh crore. Such a high valuation is on account of high reserve prices set for the 5G bands, although the prices for the 700 MHz band have been revised downwards from October 2016 auctions.

Further, the rollout of 5G services is expected to entail heavy capex and a turnaround of the existing infrastructure, including new equipment, fibre rollout and higher number of towers. The data consumption is expected to continue to grow with more applications emerging around 5G. The speeds, volumes, and applications would require upgradation of networks from the traditional microwave backhaul or copper-based cell sites to connectivity over fibre as that is more reliable, has the capacity to carry huge amounts of data at high speeds. India lags behind other countries in terms of fibre deployment with only 22% of India’s towers being fiberized vis-à-vis 80% for China. To meet the growing demand of data and address the density of population the fibre network would have to expand significantly. However, the telecom industry, which is reeling under the pressures of sizeable debt levels, low profit generation and intense competition, would find it challenging to incur such capex.

Furthermore, 5G is much beyond higher speeds only and is based on content and applications like Internet of Things, Machine to Machine communications, smart cities, smart homes, etc. While, globally some countries have concluded the 5G spectrum auctions and telcos have started rolling out 5G services, an adequate level of commercial content development is lacking, in absence of which, it will be difficult for the telcos to extract sizeable premium from the customers for such services.

Adds Mr. Jain, “The device ecosystem around 5G is still in nascent stages and the equipment is expensive both for the telcos as well as the subscribers. Further, 5G involves good quality content and services and as of now, the applications around these are not fully developed even globally. Thus, in India, subscribers are not expected to pay a premium for higher speeds only, especially at a time when the ARPU for even the basic voice and data services is at low level and the industry has not been able to generate adequate returns from the 4G services. A natural progression for the industry would be to be able to escalate the tariffs for the existing, relatively basic, services before being able to command the pricing for 5G applications which is commensurate to the level of investments required. Furthermore, auctions are now a well-entrenched means for leasing spectrum which reduces the urgency for the telcos to participate, if pricing is high. Thus there is a case for the telcos to wait for development of ecosystem before joining the auctions.”―CT Bureau