>3G Update: Pan-India 3G collections cross USD8.5bn (HSBC)

■ The DoT overall completed 104 rounds of 3G auctions at the end of Day 18. The price at the end of Day 18 increased c1.7% to USD8.6bn, compared to USD8.4bn on Day 17. The USD8.6bn price is c3.6% lower than the government’s new estimates of USD8.9bn from the 3G auctions alone and is c14.2% higher than our fair value estimates of USD7.5bn for 3G auctions.

■ We note that final 3G auction collections could be lower than USD8.6bn, as there is a possibility that the government might not find takers for all the slots available in some circles (particularly in few C category circles). As of now, we are calculating Pan-India collections assuming that all the slots are taken up. Given the limited details, we do not have complete clarity on demand in all circles.

■ We estimate fair value for pan-India 3G spectrum at cUSD7.5bn, using a bottom-up approach, and a hurdle rate of 11%. While the bids have crossed our fair value estimates, we highlight that our calculations are based on circle specific business case and the returns may differ depending on the operators’ current subscriber profile. Further, operators winning across key markets may stand with a relatively better business case. Our fair value calculation assumes a gradual adoption to 3G. However, availability of 3G handsets that allow voice/video features in the range of USD50-100 could be an upside to our business case. (Refer figure 1).

■ Mumbai and Delhi continue to see aggressive bidding, both closing over 4.5x the reserve price at the end of Day 18. Separately, fifteen circles including all B circles, Andhra Pradesh, Gujarat, Assam, Bihar, North East, Orissa, and Kolkata closed above our fair value estimates, whereas 14 circles ended with negative demand. We remain cautious on the sector, and we view consolidation as a positive catalyst, as 3G revenues appear unlikely to be material, at least in the next 12 months. However, we note that the format of consolidation will be important, and that if incremental policies allow new entrants to merge with each other, the competitive landscape may deteriorate further.

■ We remain cautious on the sector, and we view consolidation as a positive catalyst, as 3G revenues appear unlikely to be material, at least in the next 12 months. However, we note that the format of consolidation will be important, and that if incremental policies allow new entrants to merge with each other, the competitive landscape may deteriorate further.

To read the full report: 3G UPDATE