SUC reform to reduce spectrum pay-out burden, ICICI Securities

Modification in SUC, issued by the DoT, will significantly reduce spectrum pay-out burden for operators from the upcoming 5G spectrum auction, and also restrict RoIC compression. As per our calculation, access SUC rate (% of AGR) as on Q4FY22 for Bharti / VIL / RJio was 3.2% / 2.9% / 3.1%, respectively (adjusted for SUC on microwave spectrum, which is not a part of the modification issued). This is expected to dip to 0.4%/ 0.3%/0.4% for Bharti/VIL/RJio if each operator buys 100MHz pan-India in 3300MHz band, and 500MHz pan-India in 26GHz band. The total spectrum payout at reserve price is Rs352bn, and annual instalment is Rs33.7bn. However, SUC rate cut will save Rs21bn for Bharti, Rs10bn for VIL and Rs23bn for RJio on Q4FY22 annualised AGR. Therefore, actual cash outflow will be restricted to just Rs12bn for Bharti, Rs24bn for VIL and Rs11bn for RJio, respectively.

• DoT has notified modification for SUC. Under reforms for telecom sector, government has recommended to reduce spectrum usage charge (SUC) to nil for future spectrum auctions, and remove minimum SUC of 3% of AGR, and floor on SUC on 8th Oct’2021 (link). Accordingly, DoT has issued an order on SUC with certain modifications. Key points in the order include: 1) No SUC will be charged on the spectrum acquired in auction held after 15th Sep’2021; 2) SUC will be derived by the sum product of the entire spectrum holdings and applicable SUC rate divided by total spectrum holdings, which remain unchanged; 3) order does not include minimum SUC of 3% of AGR and / or any floor on SUC, thus, it is believed DoT has removed floor on SUC.
• SUC was 3.6-4.1% of AGR (including NLD) in Q4FY22. Bharti had the highest SUC as %age of AGR including NLD in Q4FY22 at 4.1%, VIL was 3.8% and RJio was 3.6%. However, it includes SUC on microwave spectrum which is not part of the above modification. SUC on microwave spectrum is estimated at 0.9% for Bharti / VIL, and 0.5% for RJio. Thus, SUC on access spectrum for Bharti / VIL / RJio works out to 3.2% / 2.9% / 3.1%, respectively, after adjusting for SUC on microwave spectrum. We have deducted 0.9% for Bharti / VIL and 0.5% for RJio from circle-wise SUC rate with floor at 3% of AGR to reach SUC rate for access spectrum.
• Applying new SUC rule on Q4FY22 (annualised) AGR shows savings of Rs10-23bn. We have tried calculating the savings of SUC for each operator on Q4FY22 AGR based on new SUC rule. The key assumptions are – 1) each operator will buy 100MHz pan-India in 3300MHz band, and 500MHz pan-India in 26GHz band in the upcoming auction and 2) assumption of SUC on microwave spectrum as explained above.
• Above quantity of spectrum acquired in the upcoming auction attracts nil SUC which will drop weighted average SUC rate to 0.4%/ 0.3%/0.4% for Bharti/VIL/RJio for access spectrum. Including SUC on microwave spectrum, the new SUC rate works out to 1.3% / 1.2% / 0.9% of AGR for Bharti/ VIL/RJio, respectively. This implies annual savings of Rs21bn for Bharti; Rs10bn for VIL and Rs23bn for RJio on Q4FY22 annualised AGR.
• Spectrum EMI payout from upcoming auction would dip to Rs11-24bn. If we continue with the above assumption of spectrum acquisition (100MHz pan-India in 3300MHz band, and 500MHz pan-India in 26GHz band) in the upcoming auction, total spectrum payout at reserve price is Rs352bn. If operator chose 20 years’ annual instalment with coupon rate of 7.2% (as notified in NIA) then annual instalment works out to Rs33.7bn. If we apply corresponding savings from SUC, annual payout for spectrum acquired in the upcoming auction reduces to Rs12bn for Bharti, Rs24bn for VIL and Rs11bn for RJio. Unlike previous auctions, we don’t expect much pressure on FCF and RoIC from 5G spectrum auction due to modification in SUC.

Read more for complete report – https://www.communicationstoday.co.in/telecom-suc-reform-to-reduce-spectrum-pay-out-burden-icici-securities/

CT Bureau