5G Spectrum Auction: High Capex A Near-Term Concern; Jio's 700 MHz Bid A Surprise, Say Analysts

The capital expenditure to create 5G capacity might have near-term implication on free cash flow for telecom firms, analysts said.

India's first-ever 5G spectrum auction saw airwaves worth Rs 1.50 lakh crore being sold. A total of 51,236 megahertz or 71% of the 72,098 MHz put up for auction was sold, Telecom Minister Ashwini Vaishnaw said while addressing the media on Monday.

Mukesh Ambani-controlled Reliance Jio Infocomm Ltd. was the biggest buyer, followed by Bharti Airtel Ltd., Vodafone Idea Ltd., and Gautam Adani-owned Adani Data Networks Ltd.

Operator-wise quantum of bids:

• Reliance Jio Infocomm: Rs 88,078 crore.

• Bharti Airtel: Rs 43,084 crore.

• Vodafone Idea: Rs 18,799 crore.

• Adani Data: Rs 212 crore.

The frequencies and bands that were bid for:

• Adani Data Networks purchased 400 MHz in the 26 GHz band.

• Bharti Airtel bought 19,867 MHz in the 900 MHz, 1,800 MHz, 2,100 MHz, 3,300 MHz and 26 GHz bands.

• Reliance Jio purchased 24,740 MHz in the 700 MHz, 800 MHz, 1,300 MHz, and 26 GHz bands.

• Vodafone Idea purchased 6,228 MHz in the 1,800 MHz, 2,100 MHz, 2,500 MHz, 3,300 MHz and 26 GHz bands.

Here's what analysts said about the auction:

• Maintains ‘buy’ on Airtel and ‘reduce’ on Vodafone Idea with target prices of Rs 866 and Rs 7, respectively.

• Auctions raked in Rs 1.5 lakh crore versus expectation of Rs 95,000 crore owing to higher-than-expected demand from all telcos.

• Demand for 3.3 GHz band spectrum was particularly strong, suggesting keen interest in rolling out 5G network.

• Jio’s acquisition of 700 MHz band spectrum will help it provide better 5G coverage than its competition. This may prompt Bharti Airtel to acquire sub-GHz spectrum to match customer experience in upcoming auction.

• Believe high bidding for 5G spectrum suggests telcos are willing to commit capital to acquire high-end customers, which implies upside risk to capex.

• Key surprise was Jio’s around Rs 40,000 crore spending for 700 MHz. Bharti Airtel claimed its largest pool of 1,800/2,100/2,300 MHz spectrum allowing it to avoid the need for an expensive sub GHz spectrum.

• Post 5G auction, Airtel and Jio remain even better placed to gain market share.

• Jio's 5G spectrum EMI is 21% of Ebitda vs 7-9% for Bharti’s consolidated Ebitda.

• Keeps FY23/25 data subscriber and revenue market share forecasts unchanged and will factor in auction spending and payments post spectrum allocation.

• 5G auction concludes largely on expected lines; Jio and Airtel strengthen 4G spectrum holdings in Vodafone Idea's key circles.

• Adani has acquired in aggregate 400 MHz spectrum across Mumbai, Gujarat, Andhra Pradesh, Karnataka, Tamil Nadu and Rajasthan in the 26 GHz band for its enterprise use.

• With acquisition of spectrum in circles such as Delhi, Mumbai, Kolkata, Kerala, Haryana, UP-East, etc., both Airtel and Jio have taken the lead in terms of spectrum holdings in the mid-band in these circles. It could accelerate market share loss for Vodafone Idea as these circles represent 72% of its revenues.

• Airtel and Jio competed for the spectrum in UP-East circle as Airtel had 6.2 MHz of unliberalised spectrum in the 900 MHz band expiring in this circle in February 2024. Jio wanted to bolster its spectrum holding in this circle so as to increase its capacity and market share in this circle where it is currently the number two player behind Airtel.

• Retain preference for Airtel as we expect the industry repair thesis to continue with the company being a beneficiary of market repair, organic growth and market share gains.

• Jio's low frequency band holding is now around 3 times that of its peers, and 10 MHz of the 700 MHz band will enable superior indoor coverage and give it a head-start in rolling out 5G standalone network.

• Bharti Airtel will have the opportunity to pick up spectrum in the 700 MHz band when 15 MHz of unsold spectrum from the 2022 auction is likely to be auctioned next year.

• Vodafone Idea has picked up adequate 5G spectrum to defend market share in its key circles, provided it raises adequate equity to fund its 5G network rollout.

• Estimate spectrum usage charge savings to result in mobile Ebitda margin expansion of 260 basis points/300 bps/210 bps for Jio/Bharti/Vodafone Idea. Indus Towers Ltd. may benefit from 5G loading in the near term, but large low-frequency holdings may keep a check on steady-state tower count.

• Jio will not be the only player with the largest spectrum footprint across 5G bands (3,300 Mhz and 26 GHz) with 44.4% and 48.5% share in the current auction but also the only one to have bid and won 700 Mhz. It indicates its ambition of rolling out an advanced 5G standalone network eventually.

• New spectrum footprint will account for 93.5% of the total cumulative spectrum footprint of Jio, implying that its SUC charge of over ~3% of revenues could come down to ~1.1%.

• For Bharti Airtel, the incremental spectrum liability vs Morgan Stanley's initial estimate would increase net debt projection by $2.5 billion. However, lower SUC charge potentially benefits Indian mobility business Ebitda margin by ~350 basis points, implying 6-7% Ebitda accretion to that business (70% of sum of the parts valuation). On a net basis, this will still lead to accretion of up to 2% to the intrinsic value.

• On the flip side, for Airtel, there is a potential for front-loading of capex in the initial years, leading to higher cash outflow than Morgan Stanley initially expected.

• With Jio winning more spectrum, especially in 700 MHz band, this will create skepticism if the company eventually looks to build a portfolio of 700 MHz in the coming years, implying higher debt.

• High spectrum bidding from Jio and Bharti could boost their capex in FY23 and could, hence, be a near-term concern.

• On the other hand, there will be a sigh of relief in many quarters over the limited bidding from Adani.

• Key surprise has been Jio’s bid for 10 MHz pan-India in the 700 MHz band; Bharti did not bid for 700 MHz this time as well due to high spectrum prices.

• Jio acquired spectrum on a pan-India basis in the 3.3 GHz band and 26 GHz band, but in a surprising development it also acquired spectrum across the sub-GHz band of 700 MHz.

• Acquiring spectrum in the 700 MHz band will provide Jio an advantage over Bharti Airtel in providing a superior network coverage, which could require Bharti Airtel to increase spectrum acquisition in the sub-GHz band in subsequent auctions to match Jio’s network quality.

• Bharti may have to increase spectrum acquisition in future rounds in the sub-GHz bands if network quality lags that of Jio in the coming years.

• Rise in 5G investments should be largely offset against reducing 4G capex. The network rollout may be staggered, given the low ecosystem development.

• Expects a healthy 18%/20% Ebitda compound annual growth rate for Airtel/Jio over FY22-24, coupled with an expectation of the next tariff hikes to cope with its 5G investments.

• The 5G bands—3,300 MHz, 700 MHz, and 26 GHz—have seen wide participation, indicating a big thumbs up to 5G despite reservations on ecosystem development.

• Completion of the 5G auction clears a key overhang on telcos, particularly Airtel, as any aggressive investment with limited near-term monetisation possibilities can add to its balance sheet woes.

• Unlike a 3G or 4G technology upgrade, which pushed consumer mobility towards data usage, 5G may not materially move the needle in the near term.

• The auction itself was not competitive with almost the entire spectrum being sold at the reserve price, but the quantum of investment was larger than expected.

• More time to make spectrum payment (20 years), low interest rates, 30-40% cuts in spectrum reserve price and sizable savings in spectrum usage charges might have prompted operators to make larger bids.

• Returns on this investment to be back-ended as 5G use cases are still evolving.

• Jio’s investment in 700 MHz band came as a surprise as it is primarily meant for 5G coverage and the use case is stronger in rural markets which may not immediately adopt 5G services.

• If 5G adoption accelerates and the next spectrum auction gets delayed, Jio can use this edge to improve its market share.

• Large spectrum holdings of existing operators rule out the entry of any new player in the industry.

• Immediate use case of 5G services will be an increase in data usage and consumers upgrading to larger packs.

• Likes Reliance Industries Ltd. and Bharti Airtel Ltd.

Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.