5G auctions: Who gains, who doesn’t and why telcos aren’t exactly thrilled

In just over a month from now, India will kickstart the process to auction 5G airwaves. This, the government hopes, will set its cash registers ringing and generate some much-needed revenue.

The government is looking to garner anywhere between Rs 80,000 crore and Rs 100,000 crore in revenue. Telecom companies, which have already been bleeding and have been on the brink of collapse for the past few quarters, could find it tough to cough up big sums of money to bid for the airwaves.

The auction is likely to begin on July 26, with the union cabinet already having given its nod to the process. The government hopes that by the end of the current financial year, Indian companies will begin offering 5G services that will be as much as 10 times faster than 4G.

The government is putting up 72 gigahertz (gHz) of spectrum on the block, hoping India’s big private telecom service providers would scramble for it.

The auction will be held for spectrum in low (600 MHz, 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz), mid (3300 MHz), and high (26 GHz) frequency bands.

The government has sought to sweeten the offer by saying it would levy zero spectrum usage charge (SUC) on the spectrum acquired and the telecom operators will not be required to make an upfront payment. The dues can be paid in 20 equal instalments. But analysts say a majority of the spectrum on offer could remain unsold.

Costly purchase

A recent report by IIFL Securities said that the three telecom operators — Reliance Jio, Bharti Airtel, and Vodafone Idea — will likely spend only about Rs 71,000 crore in the auction.

Although the Telecom Regulatory Authority of India had reduced the prices by 40% than what it had recommended earlier, telcos wanted the price to be slashed further.

The affordability factor becomes important amid estimates by brokerage houses that peg spectrum buys by all carriers at Rs 71,000 crore, the bulk of which will be new 5G bands including 3.3-3.6 GHz. Each carrier, which will have to pay Rs 31,700 crore for pan-India airwaves at the base price level, is also set to get savings from scrapping the floor of 3% SUC and removing the charge for spectrum buys in future auctions.

According to industry analysts, modification in SUC will bring annual savings of Rs 2,100 crore for Airtel, Rs 1,000 crore for Vodafone Idea and Rs 2,300 crore for Reliance Jio on Q4FY22 annualized adjusted gross revenue (AGR). If telcos buy 100MHz pan-India in 3300MHz band, and 500MHz pan-India in 26GHz band, the cheapest band by base price, in the upcoming auction, the annual payout for spectrum acquired in the upcoming auction would come to Rs 1,200 crore for Bharti, Rs 2,400 crore for Vodafone Idea and Rs 1,100 crore for Reliance Jio.

Moreover, rising telecom tariffs have meant that customers have been shutting off second SIM cards. TRAI data shows that as many as 7.5 million subscribers shut off their second SIMs in April with Airtel, Reliance Jio, Vodafone Idea and the state-owned BSNL all losing users. Airtel and Vodafone Idea contributed 90% to this loss, with Jio barely in the red.

While this does not indicate that the consumer base as a whole is shrinking, it does mean that companies are going in for a house-cleaning exercise to weed out non-paying subscribers in order to free up spectrum space.

Vodafone Idea

In fact, the precariousness of the finances of at least one of the telecom companies—Vodafone Idea—can be gauged from the fact that the company has chosen to take a four-year moratorium on paying Rs 8,837 crore as AGR dues, in addition to the option it exercised last year. The telecom company also has the option to convert interest on the deferred amount into additional equity to the government.

The government will own a 33% stake in Vodafone Idea after an earlier decision to convert interest with net present value of interest worth Rs 16,000 crore into equity. It may get a further 6-7% stake if the company opts for conversion again, a report in the Business Standard newspaper said, citing an unnamed telecom analyst.

In a bid to bail telecom companies out and avoid an imminent collapse and thousands of job losses, the government last September gave telecom firms an option to defer AGR payments for four years. Telecom companies were also given the option to convert interest on these dues into equity for the government.

Vodafone Idea, in January, decided to issue shares to the government as it opted to convert interest with a net present value of Rs 16,000 crore into government equity. After the share issuance, the promoters’ stake in the company will drop from 74.99% to 50%.

The company, on Wednesday, also announced capital infusion of Rs 436 crore by Vodafone Group Plc. However, fundraising from external investors has not materialized as yet.

“Despite no upfront payment requirements, we remain sceptical of Vodafone Idea’s ability to meaningfully participate in the auctions as it would require immediate servicing (unlike about 3.5 years of moratorium on the entire existing spectrum debt), which would be difficult given its stretched balance sheet and elusive equity fundraising," said analysts at Credit Suisse in a note to clients.

Analysts at Nomura said the company could restrict its bid for 5G spectrum to select circles, given its capex constraints, much-delayed fundraising and existing gaps in 4G coverage.

Airtel and Reliance Jio

While Bharti Airtel, too, has been on the brink in the past, it has managed to turn its fortunes around. After six loss-making quarters, the company has now been profitable for the last six, and along with rival Reliance Jio, is expected to participate in the ensuing auctions with an annual payment of Rs. 2,840 crore for pan-India 5G spectrum for over 20 years.

Credit Suisse says that while Airtel and Reliance Jio were well-positioned to participate in the 5G auctions, Airtel remains the key beneficiary of the average revenue per user (ARPU) improvement, improved regulatory environment, and organic market share gains.
 

This will impact the earnings before interest, taxes, depreciation, and amortization of Vodafone Idea the most and Bharti Airtel the least till March 2025. To mitigate the impact, ARPU would have to be increased by 6% for Vodafone Idea and 3% for Reliance Jio and Airtel, analysts say. For the quarter ended March, Airtel had an ARPU of Rs 178, followed by Jio at Rs 168 and Vodafone Idea at Rs 124.

Analysts, however, cautioned that in the past telcos have bid for more spectrum than expected, so an upcycle in telco capex over FY24-25 could follow from substantial bidding in these auctions and is, therefore, a risk.

Captive 5G networks

All three companies have been up in arms about the fact that the government has allowed non-telcos to bid for spectrum for captive use as this may threaten their enterprise revenue pipeline as most use cases will be enterprise-driven rather than focused on retail consumers.

However, some analysts feel large enterprises will accelerate private network ecosystem and aid growth in telcos’ enterprise business.

Yet, these issues notwithstanding, millions of subscribers will move to 5G in the years ahead.

European telecom gear manufacturer Ericsson expects that India will have 1.2 billion smartphones and 1.3 billion subscriptions by 2027. Of this, it says, 39% will be 5G users while 55% will use 4G. That, indeed, will give telecom companies significant traction and a much-needed revenue boost.