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5G spectrum auction: Big spenders and the road ahead

Amount of cash spent, quantity acquired signal how they plan to launch 5G

telecom rep Representational image | Reuters

The much anticipated auction of 5G spectrum concluded on Monday, after a week of hectic bidding by telecom companies. Given the precarious financial condition of the sector and complaints of high reserve price, some had expected the auction to see muted interest. Surprisingly, it netted a huge Rs 1.5 lakh crore, with about 71 per cent of the 72,098 MHz of the airwaves put up for sale, picked up.

There is one clear gainer that has emerged out of the auction and that is Reliance Jio. The country’s largest telecom operator spent as much as Rs 88,078 crore, acquiring pan-India spectrum in the 1,800 MHz, 3,300 MHz and 26 GHz bands as well as sub-GHz bands of 700 MHz and 800 MHz. This will help the company consolidate its leadership position across all the 22 circles.

Jio’s spending on 5G spectrum was more than double of Bharti Airtel, which spent Rs 43,084 crore. The second largest operator has also secured a pan-India footprint of 3,300 MHz and 26 GHz bands, while also selectively bolstering mid-band spectrum.

“Acquiring spectrum in the 700 MHz band will provide Jio an advantage over Airtel in providing a superior network coverage, which could require Airtel to increase spectrum acquisition in the sub-GHz band in subsequent auctions to match Jio’s network quality,” said Hemang Khanna, analyst at Kotak Institutional Equities.

Vodafone Idea could only buy modest-level of spectrum and that was not surprising, given its weak financial condition. The company acquired 3,300 MHz spectrum in its 17 priority circles and 26 GHz spectrum in 16 circles.

The surprise package was Adani Data Networks. However, it only secured 400 MHz spectrum in the 26 GHz band in six circles, clearly signalling its use would be for captive services only, something it had indicated earlier.

The amount of money the companies spent and the quantity of spectrum acquired by them also signal their intent on how they plan to launch the 5G services. Akash Ambani, chairman of Reliance Jio Infocomm, has said there will be a pan India 5G rollout.

The speed and scale of Jio’s 4G rollout is unmatched, and Jio is set to lead India’s march to the 5G era with a "bigger ambition and stronger resolve", he said.

Airtel said it plans to launch 5G services “in every part of the country” but starting with “key cities.”

Vodafone Idea, meanwhile, has clearly focused on priority circles, given its limited resources. The company said the spectrum acquisition would help it strengthen position in “key markets.”

Over the last 12-18 months, Vodafone Idea has lost ground to its rivals in terms of subscribers and investments. The limited 5G rollout could further widen the gap.

Adani Group said on Tuesday, the 5G spectrum it acquired is expected to help create a unified digital platform that will accelerate the pace and scale of its digitisation of core infrastructure, primary industry and B2C business portfolio.

“The Adani Group’s foray into the industrial 5G space will allow our portfolio companies to offer a set of new add on services that capitalises on all the other digital segments we are building,” said Gautam Adani, chairman of the Adani Group.

Acquiring 400MHz of spectrum is the Group’s first step in integrating its digital infrastructure portfolio, which includes data centres, terrestrial fibre and submarine cables among other things, it said.

A key near-term worry, say analysts, is the high capital expenditure the companies will incur due to the aggressive bidding.

“The high spectrum bids by all telcos is a key near-term concern as it boosts their capex and debt (though cash outflows may be limited as, mostly, telcos will opt for payment over 20 years). However, there will be a sigh of relief in many quarters at the moment over the limited bidding from Adani,” said Dayanand Mittal, analyst at JM Financial Institutional Securities.

In the last few years, telecom sector debt has increased significantly and the 5G spectrum spends will only add to it.

The telecom sector’s debt/ EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, which essentially measures the income needed to pay down debt, could rise to 4.6 times in the current financial year, from 4.2 times as on March 31, 2022, estimates Manish Gupta, senior director at CRISIL Ratings.

“Telcos have already invested Rs 5 lakh crore over fiscals 2017-21 to roll out 4G services, resulting in the sector’s gargantuan debt (including lease liabilities) of Rs 4.73 lakh crore as on March 31, 2022. Additional spectrum purchased in this auction could elevate the sector’s debt to Rs 6.1 lakh crore,” said Gupta.

In this backdrop, the companies could raise prices further this year by at least 15 per cent, say analysts. Telecom companies had last raised prices by 20-25 per cent in December 2021. Analysts now expect the next round of hikes in the third or fourth quarter of the current financial year.

The companies could also be relieved by zero spectrum usage charges (SUC) on the acquired spectrum. This could lead to potential annual savings of Rs 3,000-5,000 crore over the medium to long term, according to Rakshit Kachhal, associate director at CRISIL.

Thus far, consumer use cases for 5G have been limited and therefore monetisation of these high investments could also take a longer time, warned Naval Seth of Emkay Global Financial Services. Tariff hike announcements, recovery in data subscriber additions and capex outlook would be key monitorable, he said.

The rollout of 5G network is expected to begin from October this year, according to Union Telecom Minister Ashwini Vaishnaw.

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