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Upcoming spectrum auction; will we see another fierce battle for supremacy?

Will we see another fierce battle for supremacy?
The spectrum auction will begin on 1st Mar’21. Given the consolidation in the sector over the last decade, we hope telcos will say goodbye to the old irrational and desperate price bidding to acquire the limited available spectrum.

  • We expect low competition intensity as there is sufficient spectrum, and different band usage and priorities of each player.
  • RJio/Bharti/VIL need to spend INR280b/INR129b/INR83b at the reserve price to renew their existing spectrum.
  • However, the Earnest Money Deposit (EMD) indicates that Bharti, RJio may be interested in spending 2-3x the renewal requirement in other bands. VIL has limited options given its liquidity position.
  • The sub-GHz band will be of high interest to Bharti and RJio. But unlike previous times, both companies may choose separate bands (900MHz/800MHz), and hence, should not be a cause for concern.
  • The two bands of 1,800-2,300MHz may see some clashes, but given the sufficient amount of spectrum available, we expect limited competition.
  • With a FCF of over INR215b (excluding spectrum renewal charges) in FY22E, Bharti should be comfortably placed. However, its net debt would increase to INR850-900b. RJio has sufficient liquidity from the recent stake sale, with a FCF of INR143b in FY22E

Expect lower competitive intensity
The auction may see lower competitive intensity given the varied priorities of each player. VIL’s weak liquidity position may keep its interest low. Bharti’s sub-GHz spectrum interest may largely be limited to 900MHz, while RJio’s renewal of 800MHz spectrum may not see much interest from rest of the players. The 1,800MHz and 2,300MHz spectrum may be of high interest to both Bharti and RJio, which may eye it for their 4G plans and for their 5G requirements going forward.

How much spectrum is expiring for each telco?
In the 800MHz band, RJio will see the expiry of 115MHz, which it acquired/shared from RCOM in 19 circles. The same for Bharti and VIL stands at 57MHz in the 1,800MHz band and 37.8MHz/6.2Mhz in the 1,800MHz/900MHz band, respectively. This would cost RJio/Bharti/VIL INR280b/INR129b/INR83b at the reserve price. Though this is a mere 5-10% of Bharti and VIL’s spectrum, it is significant in the case of RJio.

EMD indicates Bharti, RJio’s interest may lie beyond renewal spectrum
RJio/Bharti has deposited a higher earnest money for the upcoming auction, while the same for VIL has been lackluster. As per media reports, RJio deposited the highest earnest money of INR90b, which would allow it to purchase spectrum worth INR450-660b. Bharti is said to have deposited INR30-33b, which would allow it to purchase spectrum worth INR150-250b. VIL has deposited a mere INR5b to buy spectrum worth INR25-35b. The high EMD will allow RJio to spend INR200-250b, beyond the INR280b that it requires for renewal of its expiring spectrum at the reserve price. Bharti will require INR130b at the reserve price to renew its expiring 1,800MHz spectrum. The management said it could also look to buy additional spectrum in the sub-GHz band. RJio/Bharti could also buy additional spectrum for 5G services as per the recent modification of rules. VIL’s low EMD against its need to spend INR83b to renew existing spectrum at the reserve price implies it may not renew all its attractive 1,800MHz/900MHz spectrum, further weakening its position.

Sub-GHz spends by Bharti, RJio could be of key focus, but in different bands
Bharti intends to build a sub-GHz spectrum coverage. In six circles with a market share of about 20%, it has no sub-GHz (900MHz) spectrum. In the remaining circles, it has below 10MHz, so it could explore additional spectrum. This may necessitate an investment of INR60-80b if it plans to acquire spectrum in majority of the circles. If RJio acquires on an average 10MHz in 800MHz across all 22 circles, it may need to spend about INR55b. But given that the demand of both telcos is in different spectrum bands, we may see lesser competitive intensity.

1,800MHz and 2,300MHz could see a clash
Bharti has a strong portfolio of 1,800MHz spectrum, with an average 15MHz in 15 circles and below 10MHz in four circles. In Delhi, it does not have a high proportion of spectrum in 900MHz and largely relies on 2,300MHz for capacity. So, it could be keen to acquire spectrum in 1,800MHz, which could entail an investment of ~INR22b for 5MHz at the reserve price. RJio has an average 7MHz in 1,800MHz, so it could spend wherever sufficient 800MHz spectrum is unavailable. In the 2,300MHz band, both Bharti and RJio could look to top up their spectrum capacity. Bharti may choose to fill gaps in the three circles where it does not hold any spectrum. But with a healthy 2-4 blocks of 10MHz available in 2,300MHz, there could be lesser competition intensity.

Implication on Bharti, RJio’s cash flow and Balance Sheet
With a FCF of INR99b/INR215b in FY21E/FY22E (excluding spectrum renewal), Bharti should be comfortably placed. But it could reduce the company’s FY22E post interest FCF to INR75b and increase its net debt to INR882b (v/s INR755b expected earlier). RJio has sufficient liquidity from the recent stake sale to fulfil its capex requirement, with a FCF of INR132b/INR143b in FY21E/FY22E. VIL’s liquidity remains precarious and may choose not to renew its existing spectrum in most circles. We have factored in INR130b/INR280b towards spectrum acquisition for Bharti/RJio. We maintain a Buy on Bharti with a TP of INR720 and value RJio at INR900/share.












Motilal Oswal

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