Three charts that explain Jio’s need to spend more in 2021 auctions

Spectrum auctions have been major events in the history of the Indian telecom sector. Irrational bids in the past have resulted in high indebtedness and brought some firms to their knees. The 2021 spectrum auction, in contrast, is expected to be a far simpler affair. Telcos are expected to quietly pick up what they need rather than slug it out for scarce spectrum.

Even so, Reliance Jio Infocomm Ltd’s earnest money deposit (EMD) is more than three times that of its largest competitor, Bharti Airtel Ltd. Jio will be spending far more than the others, and although Airtel’s deposit seems low, it may end up driving prices higher for spectrum in at least one band, analysts say.

Jio has made an earnest money deposit of ₹10,000 crore for the 2021 auction, while Bharti Airtel and Vodafone Idea Ltd’s (VIL) deposits were ₹3,000 crore and ₹475 crore, respectively. Analysts estimate that telcos can bid for spectrum worth five to seven times EMD.

Bharti Airtel and VIL have reasonably high levels of spectrum and also don’t need to bid for large renewal spectrum. But Jio needs some renewal spectrum, and also has to augment 4G capacity in some circles. Jio needs to bid for 800MHz spectrum in some circles as its licence is expiring, and renewing existing holdings will result in bids worth around ₹20,000 crore, according to analysts. If the company chooses to hold a minimum of 10MHz in the 800MHz band in each circle, it would need to bid for spectrum worth ₹35,000 crore, industry veteran Parag Kar wrote in a blog.

But most analysts expect the company to train its guns on the far cheaper 2300MHz band to augment its 4G capacity, rather than hold large amounts of spectrum in sub-GHz bands.

As the charts show, Jio has been losing subscriber share in recent months to Airtel. And its share of incremental data volumes in 2020 was lower than Airtel’s, despite having a much higher base—just a year ago, data traffic carried on Jio’s wireless network was more than double that of Airtel.

And in a really telling sign that Jio’s growth engine was sputtering in 2020, it turned out that its wireless data volume growth was only marginally better than that of cash-strapped VIL. Jio’s wireless data volume grew 22% last year, while VIL’s volume grew 18%—Airtel was far ahead with 52% growth.

Jio has a large network that can serve its over 400 million customers. But customer surveys and studies show that while coverage is vast, user experience is not at the top-end. “Especially in large urban centres, the firm has been facing capacity constraints, and this has impacted its growth metrics,” said an analyst at a domestic institutional brokerage. Jio’s subscriber numbers were hit recently during the farmer protests, although it doesn’t explain the secular decline in growth rates in the past year. “The company is likely to augment capacity by buying spectrum in the relatively cheaper 2300MHz band,” the analyst added.

But while spectrum is cheaper in this band based on reserve prices, competition from Airtel may well drive prices up. “Our base case assumption was Bharti will complete 30MHz spectrum in the 2,300MHz band; however, its higher EMD means it may beef-up spectrum quantity up to 40MHz in many/all circles. This band may be critical for 5G launch in future,” analysts at ICICI Securities Ltd said in a note to clients.

“This may be the only spectrum band that sees competition, and prices may rise by around 75% over the reserve price,” said the analyst mentioned above.

There is unlikely to be competition in any of the other bands. The highly expensive spectrum in the 700MHz band was always expected to be left untouched, and the EMD amounts make it clear that will indeed be the case. Airtel and VIL are expected to pick up 900MHz spectrum in 1-2 circles, apart from buying some spectrum in the 1800MHz band to augment capacity.

Another important factor to note is that companies will have in mind their 5G rollout plans, and wouldn’t want to splurge in this auction.

But while the wait for 5G spectrum in the over 3GHz band continues, Jio’s slow data volume growth and subscriber share loss is likely to result in some spending to beef up 4G capacity. Livemint