5G

Telcos ready for 5G, but will rollout be at accelerated pace, ICICI Securities

August 03, 2022

Spectrum auctions have concluded with telcos committing to a total payout of Rs1,502bn. This is significantly higher than we expected and is due to aggressive spectrum purchase by Reliance Jio (RJio); it bought 10MHz pan-India in 700MHz band. Commentary suggests RJio will do 5G rollout at an accelerated pace and likely on advanced 5G (SA-5G). Post auctions, RJio’s net debt will increase to Rs1,750bn. In contrast, Bharti was controlled in spectrum purchase, and still commenting more calibrated 5G rollout, and large spectrum investment to be behind. The key to watch is: will RJio’s accelerated 5G rollout push Bharti to relook at its 5G capex and spectrum investment, particularly in the 700MHz band. Bharti’s net debt adjusted for fund raise will be Rs1,350bn. VIL made bold purchases despite balance sheet constraints, and bought spectrum worth Rs188bn. Company remains relevant in the India market. Adani bought much lower spectrum at Rs2bn. There will not be much strain on cashflows of the telcos given payment period of 20 years and SUC savings (which will reduce annual instalment burden by 40%).

Telcos commit Rs1,502bn for spectrum. The auctions lasted seven days and concluded with telcos cumulatively buying spectrum worth Rs1,502bn. Bulk of the commitment went for 5G spectrum in C-band (3,300-3,630MHz), mmWave (26GHz) and sub-GHz (700MHz). Telcos also bought some spectrum in other bands to boost 4G capacity. They will have to do combined upfront payment of Rs75bn within 10 days of conclusion of the spectrum auctions. This is reasonable as they have the option to pay the rest over 20 years with an interest rate of 7.2%. SUC-savings are huge as the new spectrums will attract nil SUC (refer: link) and significantly reduce the annual instalment burden. Total annual instalment for the spectrums purchased (by the four companies) is Rs140bn, while annual SUC savings will be of Rs56bn (~40% of annual instalment). Thus total combined payment burden for spectrum is Rs84bn, or 4.2% of Q4FY22 annualised revenue.
RJio has significantly upped the ante in 5G. RJio was most aggressive in the auctions and committed Rs881bn for spectrum, which is >2x Bharti’s. RJio has bought 10MHz of 700MHz band spectrum pan-India and 100-130MHz in C-band (130MHz in eight circles). This should enable RJio to launch SA-5G (standalone-5G), which is a superior version of 5G that will have all the features unlike global adoption of NSA-5G (non-standalone 5G). Further, sub-GHz bands should ensure better consumer experience (only operator to have sub-GHz in 5G immediately), which could drive higher revenue market share and reduce network operating costs. RJio has added 20MHz in 800MHz band, which completes 10MHz pan-India for the company in the band, and 60MHz in 1,800MHz band for 4G capacity. The total payout for RJio works out to Rs881bn (in past two years it invested Rs1,450bn in spectrum) and upfront payment is Rs44bn, while annual instalment after SUC savings (of Rs24bn) will be Rs58bn. This should increase RJio’s net debt to >Rs1,750bn post purchase of the spectrum. Further, we expect accelerated capex as the company may be aggressive in its deployment of 5G. In its previous earnings call, RJio had mentioned it is prepared to launch 5G in 2,000 cities and towns.
Key points from RJio press release: 1) Company gets ready to roll out the world’s most advanced-5G network across India and to make India the global leader in digital connectivity and digital solutions (this in a way indicates SA-5G); 2) company leverages combination of its Atmanirbhar technology expertise, extensive infrastructure and partnerships with global technology majors (RJio is likely to rollout some network on own 5G stack); and 3) it is fully ready for 5G rollout in the shortest period of time because of its nationwide fibre presence, all-IP network with no legacy infrastructure… ‘We will celebrate ‘Azadi ka Amrit Mahotsav’ with a pan-India 5G rollout’ (accelerated 5G rollout in India).
· Bharti is controlled in capital allocation. Bharti has maintained discipline in capital allocation for spectrum with purchase of 100MHz pan-India in C-band and 800MHz in 26GHz. It has also bought some spectrum in 900 / 1,800 / 2,100MHz to boost 4G capacity, or bought spectrum in advance for upcoming expires. The total payout for Bharti will be Rs431bn, and upfront payment is of Rs22bn; annual instalment after SUC savings (of Rs22bn) will be Rs18bn, which we believe will not strain the balance sheet much. Company’s net debt rises to ~Rs1,550bn post purchase of the spectrum, which should reduce by Rs150bn pending fund infusion from rights issue and Rs50bn from preferential issue to Google. Thus underlying net debt will be Rs1,350bn. However, key to watch is Bharti’s timing to purchase 700MHz band spectrum which, at current prices, will cost Rs200bn for 5MHz pan-India, and likely accelerated 5G capex (which poses a downside risk to our FCF estimates). We believe Bharti will stick to NSA-5G in the initial rollout.

Key points from Bharti’s press release: 1) Airtel now plans to launch 5G services in every part of the country starting with key cities. It is convinced that its higher-quality customer base will adopt 5G devices at a rapid pace in the country (Bharti is still not showing aggression in 5G deployment, but will competition push the company to change its stance?) 2) Company’s existing pool of spectrum is already the best in industry, which means it does not need to spend any material sum on spectrum for many years to come. (Bharti has indicated that big investment in spectrum is behind, but 700MHz purchase may require a relook).
VIL was bold despite balance sheet constraints. VIL has bid for C-band spectrum in 17 circles with 50MHz quantity in each circle, and bought 26GHz band spectrum in 16 circles. It has also bought certain spectrum in 1,800 / 2,100 / 2.500MHz bands to boost 4G capacity. The total payout for VIL will be Rs188bn and upfront payment is of Rs9bn; annual instalment after SUC savings (of Rs9bn) works out to Rs8bn, which we believe is reasonable. This should increase VIL’s net debt to ~Rs2,150bn.
Adani remained selective and restricted to 26GHz. Adan Data Networks was surprisingly very conservative in purchase of spectrum vs concerns in the market. It purchased a total of 400MHz spectrum in 26GHz band. It has purchased 100MHz each in Mumbai and Gujarat understandably due to its port and airport operations. It has bought 50MHz spectrum each in Karnataka, Andhra Pradesh, Tamil Nadu and Rajasthan. The total payout is Rs2bn for Adani.

For report, https://www.communicationstoday.co.in/telcos-ready-for-5g-but-will-rollout-be-at-accelerated-pace/

CT Bureau