Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications may skip the super efficient 700MHz spectrum in the upcoming fiscal, given their stretched balance sheets and need to preserve cash in light of impending competition from the entry of Reliance Jio in March-April 2016, Fitch Ratings said in a note.
The firm said that efficiency gains from deploying 4G services on 700MHz will be insufficient to offset the relatively high price. India's telecom regulator, Trai, just recommended a reserve price yesterday of Rs 115 billion ($1.7 billion) per MHz for pan-India 700MHz spectrum. The reserve price for the 700 MHz band is about 2.0x, 3.4x and 4.0x of the recommended reserve price for 800MHz, 900MHz and 1800MHz spectrum, respectively.
The price for 700MHz spectrum could exert further pressure on participating telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term, the firm said.
Consequently, the 700MHz spectrum auction planned in the second half of the next fiscal year may not be attractive to telcos, given limited device availability and that telcos possess alternative spectrum (850MHz/1800MHz/2300MHz) to roll out 4G services, Fitch Ratings said.
The GSM lobby body COAI said that it will approach the regulator to understand the methodology it used to conclude recommendations. Though Trai has explained the mechanism it used for calculating spectrum base price, COAI wants to re-confirm with the regulator if it has taken into consideration market conditions and financial conditions of telecom operators.
Market leader Airtel owns about 40% of the private telcos' 900MHz, and will offer 4G services in 1800MHz and 2300MHz. Reliance Jio, after having invested about $15 billion on spectrum and networks, has access to the pan-India 800MHz/850MHz spectrum.
In March 2015, the telcos committed the largest-ever investment of $17.7 billion, mainly due to the necessity to retain their expiring spectrum to avoid network disruption. The auction saw aggressive bidding as spectrum offered was limited. “We believe that there are far fewer reasons for telcos to invest as much in the 700MHz auction,” the firm said.
Furthermore, the regulator's approval in September 2015 to allow spectrum sharing and trading will allow telcos to buy or share spectrum among themselves, and could make bidding in spectrum auctions unattractive.
The industry is consolidating gradually into six major participants. During 2015, Rcom announced its equity-merger with Sistema JSFC's Indian unit, MTS India, and has further plans to merge its wireless unit into Maxis Berhard's Indian unit, Aircel Limited. Videocon India, one of the smaller firms which is struggling, has agreed to sell its 4G spectrum assets to the third-largest telco, Idea Cellular.
Fitch believes that smaller and weaker telcos will further seek M&A or exit the industry, in light of the high spectrum prices and stretched balance sheets.
Fitch has a negative outlook on Indian telcos for 2016.
“We expect competition to intensify upon Jio's entry in the market, as it is likely to provide cheaper and faster data-focussed tariff plans armed with sufficient spectrum and access to funds,” the firm said.
Blended monthly average revenue per user could fall by 5%-6% to around Rs 160 this year, as compared to Rs 170 in 2015, due to a decline in data tariffs, which will more than offset the rise in data usage. The top-four telcos' average operating EBITDAR margin will narrow by 100bp-200bp (2015: 35%) due to competition and greater marketing spend.