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Spectrum auction ends – telcos on a shopping spree!

The telecom spectrum auction ended after six rounds on Day 2. The key highlights are:

* The government raked in INR778b v/s its expectation of INR450b from the sale of 855.6MHz of spectrum, ~37% of the total 2,308.8MHz put up for auction. This is ~60% higher than the renewal spectrum requirement across telcos.

* This was led by RJio/Bharti, which bought bulk of the spectrum – 488.35/355.45MHz – for INR571b/INR187b, i.e. 44%/104% higher than that required for renewal. VIL response was muted. It bought spectrum worth INR20b in just five circles (76% lower than that required for renewal).

* The widespread acquisition by RJio/Bharti can be explained by: a) renewal of existing spectrum, b) investment in lower bands to deepen coverage, and c) investment in capacity bands (2,300MHz) to debottleneck networks and prepare for a seamless switch to 5G in the future.

* The government will receive ~INR270b upfront (RJio/Bharti to pay INR199b/INR70b) and the rest after a two-year moratorium.

* Bharti’s commendable execution in the last 12 months, with continued market share gains, gives us confidence that irrespective of a higher-than-expected capex and delayed price increase, it can deliver 18-20% EBITDA CAGR over the next three years, garnering 7-8% FCF generation, led by higher incremental 4G share. Maintain Buy.

* RJio has further strengthened its capabilities. Being the leader, it should benefit as better tariff rates prevail. We maintain our TP of INR900/share.

* VIL’s low participation is evident from its weak liquidity. Its huge debt leaves limited options. Maintain Neutral.

Telcos in shopping mood; response higher than our expectation

* The Department of Telecom received total bids of INR778b (incremental bids of INR6.7b received on 2 Mar’21) v/s the government’s expectation of INR450b

* This was led by RJio/Bharti, which bought 488.35MHz/355.45MHz of spectrum for INR571b/INR187b. VIL response was muted. It bought spectrum worth INR20b in just five circles.

* Of the total offered spectrum of 2,308.8MHz, right to use has been acquired for 855.6MHz, i.e. 37%. Excluding 700MHz and 2,500MHz, this is ~60% of spectrum.

* In the CY16 auctions, 41%/12% of spectrum was sold by quantity/value to seven bidders, while in this auction 37%/19% was sold to just three participants.

* SUC will be chargeable at 3% of AGR, excluding revenue from wireline services.

Sub-GHz spectrum generated huge interest

* In line with our expectation, the 800MHz band generated the highest interest, with spectrum acquisition of INR375b. This was due to renewal of RJio’s existing spectrum in this band in 19 circles. RJio acquired 133.75MHz v/s expiring spectrum of 115MHz. It renewed higher spectrum in most metro and A circles (Delhi, Mumbai, Maharashtra, Kerala, Karnataka, Kolkata, Tamil Nadu, and West Bengal), while some circles witnessed lesser interest (Gujarat, Punjab, UP East, and UP West).

* Bharti showed interest in sub-GHz spectrum – 800MHz and 900MHz – in line with the management’s guidance. It purchased 16.25MHz spectrum worth INR30b in four circles – Haryana, MP, Maharashtra and UP West – in the 800MHz band.

* It acquired 32.6MHz spectrum across nine circles in the 900MHz band for INR65b. With this, Bharti has established its nationwide coverage using the subGHz band, in line with its strategy.

* VIL acquired 5.8MHz in the 900MHz band.

Mid-band raked in over INR180b

* The 1,800MHz band generated significant interest with the acquisition of over 152.2MHz. The higher interest was due to expiring spectrum of both Bharti/VIL and increased interest of RJio. Bharti/RJio/VIL acquired 71.6/74.6/6MHz.

* Bharti purchased spectrum worth INR58b (v/s INR130b required for renewal of spectrum in this band), while RJio spent INR125b. The difference in the amount paid, despite the similar quantity, can be attributed to the higher interest of RJio in metro/Tier I circles like Delhi, Mumbai, Maharashtra, and Gujarat. RJio bought spectrum worth INR69b in these circles – higher than Bharti’s total purchase.

* Bharti has clearly shown restraint where it has sufficient liberalized spectrum available. It did not acquire its expiring spectrum in Gujarat, Haryana, Mumbai, and Maharashtra circles and acquired a lower amount in Kerala, MP, and UP West as it had purchased spectrum in other bands for these circles, except Mumbai where it did not buy any spectrum. Only in Tamil Nadu, it acquired a higher quantity than the expiring spectrum.

* In the 2,100MHz band, Bharti acquired 15MHz across three circles (Assam, North East, and West Bengal) spending INR3.6b.

About 90% of the auctioned capacity sold out

* The 2,300MHz band generated substantial interest, with demand touching ~90% of the auctioned spectrum. The high interest in this band can be explained by: a) need for capacity spectrum as cell site density is at optimum levels for Rjio/Bharti, while data growth continues at an exponential pace, b) Bharti/RJio has a presence in this band, unlike sub-GHz, which is split between 900MHz and 800MHz, c) seamless capability of re-farmed 2,300MHz to 5G, particularly in metros and Tier I circles, which would be the earlier movers to 5G.

* Bharti/RJio bought 220MHz/280MHz of spectrum worth INR30.7b/INR101.7b. The difference in the amount paid is due to RJio’s focus on metro/Tier 1 circles like Delhi, Mumbai, Andhra Pradesh, Karnataka, and Tamil Nadu, where Bharti did not acquire spectrum

Overall spectrum holding of players

* At the end of the spectrum auction, Bharti holds 27.5/149/303.85/185/790MHz in the 800/900/1,800/2,100/2,300MHz band.

* RJio holds 148.75MHz in the 800MHz band (16% lower than Bharti’s sub-GHz holdings), 221MHz in 1,800MHz (v/s Bharti’s 303.85MHz), and 880MHz in 2,300MHz (v/s Bharti’s 790MHz).

* VIL holds 141.2/355.9/30/195/370MHz in the 900/1,800/2,300/2,100/2,500MHz band.

Valuation and view

* Bharti spent INR187b at the auction v/s INR130b required for renewal of spectrum. This would increase its spectrum capex by 44% in FY22E and would reduce its FCF to INR12.6b in FY22E v/s INR75b earlier. Its net debt would increase to INR1,661b from INR1,474b at present (including lease liabilities). We maintain our TP at INR720 per share, ascribing a 10x/6x FY23E EV-to-EBITDA to the India/Africa business. The company’s commendable execution in the last 12 months, with continued market share gains, gives us confidence that in spite of a delayed price increase and higher-than-expected capex it can deliver 18-20% EBITDA CAGR over the next three years, garnering 7-8% FCF generation led by higher incremental 4G share. Maintain Buy with a TP of INR720/share.

* RJio spent INR571b at the auction v/s INR280b required for renewal of spectrum. This would increase its spectrum capex by 103% in FY22E and would reduce its FCF to -INR420b in FY22E v/s -INR133b earlier. Its net debt would increase to INR476b in FY22E v/s current expectations of INR189b. However, the company could easily manage with the amount received through stake sales. We maintain our TP of INR900/share at an FY23E EV-to-EBITDA of 18x. The higher multiple captures an additional revenue opportunity from Digital ventures, which are not factored into our estimates. Maintain Buy.

* VIL spent INR20b at the auction v/s INR86b required for renewal of spectrum (i.e. 76% lower than the renewal amount), given its weak liquidity position. The significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the higher operating leverage opportunity from any source of ARPU increase. We assign 10x FY23E EV-toEBITDA to arrive at our target price of INR11/share. Maintain Neutral.

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