Monday, April 30, 2012

TELECOM REGULATORY AUTHORITY OF INDIA: New spectrum pricing to dent business

Telecom Regulatory Authority of India (TRAI) has come up with a recommendation on auction of spectrum and suggests a reserve price of Rs36.2bn for 1800MHz and 4x/2x/2x the price of 1800MHz for 700MHz/800MHz/900MHZ spectrum bands. TRAI also recommends spectrum re-farming which is further going to hurt incumbents. Overall, we believe the regulator’s recommendation, if considered, would not only hurt incumbents by way of higher spectrum
renewal payouts and possibility of losing the high quality 900MHz spectrum, but also make the business case weaker for new operators to re-enter the Indian market based on current tariff plans.

 Spectrum pricing and re-farming to 1800MHz: TRAI has recommended reserve price for different bands in line with international pricing on per MHz per population basis which is 8% higher than 3G spectrum auction price and the new recommendation is Rs36.2bn per MHz for 1800MHz. The pricing for 700MHZ, 800MHz and 900MHz is recommended at Rs144.9bn, Rs72.4bn and Rs72.4bn respectively.

 Auction timelines and payment terms: Spectrum auctioned would be made available for 20 years. TRAI also recommend installment based payment structure wherein 25% of bid amount for 700, 800, 900MHz and and 33% for 1800, 2100, 2300 would be paid initially and balance in 10 equal yearly installments. Spectrum usage charges will be at 1% AGR on the spectrum acquired through auction from hereon as against 3-6% of AGR being charged presently.

 Additional payout to hurt the sector – Bharti relatively better placed: The recommendation looks very aggressive and would face severe opposition from operators. Telecom operators are likely to force a relook at spectrum pricing recommendations especially due to the muted impact of 3G spectrum auction results thus far and the fact that the pricing weakens their business models further and contradicts the affordable service objective of the government. While we believe that Bharti would be better placed to take on the additional burden compared to Idea and RCom due to its balance sheet size and leverage ratio if the recommendation gets accepted. Idea would have to immediately pay out considering that SC has cancelled its 7 licenses. We currently have a Buy rating on Bharti, Hold on Idea and Sell on RCom. We expect the current TRAI recommendation and future risks to put pressure on stock performance. We would be reviewing our price target after further clarity emerges. Other risks on the sector are removal of roaming fees charged, allowing voice over IP in India, stringent security norms
for equipments procurement.

TRAI’s auction of spectrum recommendation

Key highlights
■ All spectrum will be allotted through auction mechanism in future
 700Mhz band auction will be in 2014 as and when eco system for LTE in 700MHz is reasonably developed
 Liberalization of spectrum - removal of technology restrictions will give the licensee an option
to deploy new technologies. Any further spectrum auctioned would be liberalized spectrum.
Liberalized spectrum would be for 20 years.
 Spectrum Re-farming – TRAI recommends 900MHz spectrum auction 18 months before the
expiry of license. Hence, the auction will be carried out in the first half of 2013
 Cap on Spectrum – limit for acquisition of spectrum will be 50% of the spectrum assigned in
each band in the respective service area and 25%of the total spectrum assigned in all bands put together in each service area
 Reserve price recommendations for different bands are in line with international pricing on per MHz per population basis. Pan India pricing now stands 8% higher than the 3G spectrum
auction price and now the recommendation is Rs36.2bn per MHz for 1800MHz
 Payment of spectrum amount on installment basis – Initial payment of 25%/33% of bid amount for 700,800,900MHz/1800,2100,2300 and balance in 10 equal yearly installments.