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Why your mobile bills could go up by 25% in 2021

India’s nearly 961 million mobile subscribers (as of October 2020) may soon find their monthly bills increasing. Cash-strapped telecom companies, who recently spent Rs 77,814 crore buying additional spectrum, are expected to pass on the cost of their purchases to consumers. India is fast losing its tag of having among the lowest telecom rates in the world—telcos last raised their rates in 2019, by 40 per cent.

Earlier this month, the government concluded its latest 4G spectrum auction, selling 855.6 MHz of the total 2,308.8 units of spectrum put up for sale. Overall, it received Rs 77,814 crore, a figure it said was better than its expectations.

Ratings agency Crisil expects tariffs to rise in the range of 25-30 per cent if telcos are to achieve a sustainable return on capital employed of 8-10 per cent. Telecom majors are already reeling under a 2020 Supreme Court order to pay adjusted gross revenue dues to the government. However, the new spectrum purchases also signal their preparedness to roll out 5G in the country—the spectrum they have bought will support them in their effort.

The last time auctions took place was in October 2016. At the time, there were seven companies in the fray. This time, the number of companies dwindled to three—Reliance Jio, Bharti Airtel and Vodafone Idea—due to consolidation in the industry over the past few years. Reliance Industries-owned Jio spent Rs 57,122 crore to buy 489 MHz across three bands. Airtel’s buying was across five bands, concentrated in 900 MHz and 1,800 MHz—it spent a total of Rs 18,699 crore. Vodafone Idea bought 11.8 MHz, worth Rs 1,993.4 crore. Media reports say that market leader Jio spent more per MHz of spectrum than Airtel, which means it expects strong consumption growth in areas with good tele-density.

The spectrum sales in this month’s auction were conducted at a reserve price which restricted the price per unit of spectrum to Rs 90.9 crore, 35.4 per cent higher than the price per unit in the October 2016 auction. ‘This price increase is expected to result in higher average revenue per user (ARPUs) in the coming months as achieving higher ARPUs remains the focus point of the telecom industry’, says a report from Care Ratings. Industry ARPU, which has increased by 22.5 per cent to average at Rs 93 in the past three quarters (January 2020-September 2020) compared to Rs 76 during the April 2019-December 2019 period, is however lower than the ARPU levels of Rs 124 in FY16, before Reliance Jio entered the telecom market, it added.

A key takeaway from the auctions, according to Care Ratings, is that the industry is preparing to build network capacity for deployment of 5G services—telcos have said that the acquired spectrum will support their roll out of 5G services in the future.

The 2,300 MHz band was the most preferred among bidders. Despite a sharp 43 per cent reduction in the reserve price for the700 MHz band (considered the most efficient spectrum band) compared with the previous auction, reserve prices were high overall, which led to spectrum remaining unsold across circles for the second straight auction. “While the overall premium (over the reserve price) has come down to below 5 per cent, for the 900 MHz band, it was much higher at 30 per cent as the reserve prices were reduced by 65 per cent from the previous auction,” says Nitesh Jain, director, Crisil Ratings. As per the bidding terms, telcos will need to pay nearly Rs 27,000 crore (about 35 per cent of the total value) upfront, assuming they opt for deferred payment. The balance will have to be paid after a two-year moratorium via equated instalments over a span of 16 years.

In February 2020, the Supreme Court had pulled up telcos for not paying Rs 1.5 lakh crore they owed to the government in annual licence fees and spectrum usage charges. Later, the apex court allowed them to make payments in a staggered fashion over a period of ten years, starting April 1 this year. According to Crisil, the purchase of spectrum will put further pressure on telcos. “The average debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio will increase to 5.4 as on March 31, 2021, from Crisil’s previous estimate of 4.4,” says Jain. This higher leverage could therefore lead to tariff hikes. Crisil expects tariffs to rise in the range of 25-30 per cent if telcos have to get a sustainable return on capital employed of 8-10 per cent and for the debt-to-EBITDA ratio to reduce to 3.5-4 by the end of the next fiscal. India Today Insight News

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