>India Wireless: 3G Auctions(MACQUARIE RESEARCH)

Event
■ The auctions for 3G and the Broadband Wireless Access (BWA) spectrum are set to start on 9 April 2010 (Detailed time table of auctions in Figure 5). We look at implications for Indian telcos and the likely bidding behaviour. We maintain our view that prices discovered from the auctions will likely surprise on the upside.

Impact
■ Prices likely to surprise on the upside given tremendous interest. We believe likely cash outflow for pan-India 3G and BWA spectrum to be ~US$2bn and ~US$750m-1bn, respectively. We expect fierce bidding given only 3 slots are available for 3G and 2 slots for BWA in most circles. We expect incumbents Bharti, RCOM and Vodafone to bid aggressively for pan-India 3G, Idea to bid aggressively in about 12-15 circles and Aircel to bid most aggressively in existing 2G strongholds numbering about 5-6 circles. Tata Teleservices (Not listed) is also likely to bid aggressively for 3G spectrum in about 15-16 circles, where they have already established a 2G GSM presence.

■ Auction guidelines validate our negative investment thesis on MTNL as it outlines that MTNL needs to match the highest bid price in both Delhi and Mumbai (We expect a US$750m combined outgo for the two cities). For the 3G slot reserved in each of the 22 circles, state-owned operators, MTNL and BSNL, would need to match the price discovered through the
auction process and are subject to the same payment terms as private telcos.

■ Bharti balance sheet will be stretched post Zain acquisition. We note Bharti’s balance sheet will be the most stretched in the sector (FY11E Net Debt/Equity of 1.4x and Net debt/EBITDA of 2.8x) post 3G auctions, assuming the Zain Africa acquisition goes through post regulatory approvals. (See Figure 1).

■ Commercial launch of 3G only in Dec 2010 or later. Even though auctions are being held in April, spectrum will likely not be made available for network rollouts before September 2010, and rollouts will take another 3-6 months.

■ Spectrum will be allocated through a simultaneous ascending e-auction comprising two stages. The ‘Clock Stage’ will establish the final winning bidders and a common winning prize for all lots of spectrum bands in a service area. The ‘Frequency Identification stage’ will be a random identification of frequencies performed automatically by Electronic Auction.

■ 3G spectrum comes with stringent rollout obligations for winners. If the 3G winner does not achieve its rollout obligations (detailed on page 5), it shall be allowed a further period of one year to do so. On failure to do so, even within the extended period, the spectrum assignment shall be withdrawn by Govt.

Outlook
■ Reiterate Underweight on India Telcos on bleak growth outlook and premium valuations. Expect wireless KPIs for listed telcos to continue to deteriorate for next two quarters; we see downside risks to consensus estimates for FY3/11E. Indian telcos trade at a significant premium to the region on EV/EBITDA with comparable growth and lower dividend yields - Bharti at 7x, Idea 5.8x, and RCOM 5.9x FY3/11E vs the Asia telcos average of 4.3x. We expect this premium to narrow as India’s growth premium subsides.

To read the full report: INDIA WIRELESS