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Expect no bidding war

The EMD announced by each telco underscores sizeable 5G participation, except the Adani Group, but limits the scope for a bidding war.

* What does the EMD quantum reveal? The DoT announced its list of prequalified bidders for the upcoming 5G auction, along with the earnest money deposit (EMD) as per the respective telco’s bidding requirement. The EMD announced by the participants (typically the maximum auction participation is 8- 10x of the EMD), underscores sizeable 5G participation by each telco, except the Adani Group, but limits the possibility of a bidding war. Telcos have offered a sizeable EMD in a bid to create a reasonable war chest to combat any aggression ahead of the 5G auction.

* The Adani Group is not a contender: Abating concern of the Adani Group’s entry into the Consumer Mobility space, its mere INR1b EMD hints at its low auction participation in a few circles (likely in the 26GHz spectrum band). A pan India 26GHz spectrum (used for localized enterprise solutions) for 1000MHz costs INR70b. It may limit its bids to select circles (where it has an airport, port, logistic operations, and power assets) for possible 5G enterprise solutions.

* RJio is creating a war chest: RJio’s INR140b EMD is startling by all imaginations. Its high EMD can possibly be to create a reasonable war chest to combat any aggression ahead of the 5G auction. Considering it goes full throttle acquiring 5G spectrum across all bands (10MHz/100MHz/1000MHz quantity in the 700MHz/ 3300MHz/26GHz band), it will still require sub-INR800b at the current reserve price, way below the maximum allowance allowed under the EMD. We expect RJio to limit its spending to INR400-500b for 3500MHz in the 26GHz band, with limited participation in the high cost 700MHz band.

* BHARTI’s EMD in line: BHARTI’s EMD of INR55b should suffice for an investment of INR350-400b in the upcoming 5G auction, with 100MHz spectrum bid for in the 3300MHz band on a pan India basis. This is in line with our expectation and should be offset against the INR210b fund raise (INR160b right call money and INR52b investment by Google).* 

Is Vi eating more than it can chew? Vi’s EMD of INR22b may allow it to bid for over INR150-200b worth of spectrum. This may lead to a 50MHz spectrum bid in the 3300MHz band, with an annual payout of INR10b. With an EBITDA (pre Ind AS 116) of a mere INR80b, its capex is much lower than peers. This can further impact its ability to invest in its network.

No risk of overbidding: Unlike previous auctions, there is: a) abundant spectrum; b) limited participants; and c) cap on spectrum bidding to limit the bidding space to three-to-four sizeable players across 5G bands (viz. 700MHz, 3300MHz, and 26GHz). Even if RJio (looking at its aggressive EMD) or any other player bids aggressively, a) it may not move the reserve price materially, and b) it will still leave sufficient room for all players to acquire spectrum, either in this or subsequent auction.

5G auction to add limited incremental revenue: Unlike a 3G/4G technology upgrade, which pushed consumer mobility towards data usage, 5G may not materially move the needle in the near term, given: a) wireless data subscribers have crossed over 70% of total subscribers, b) 5G may not offer materially higher ARPU, and c) players will take a reasonable time to ramp-up their network. Thus, 5G may only help in network debottlenecking in limited locations and offer FWA (fixed wireless access) and enterprise solutions.

Looking beyond the 5G auction: The 5G auction remains a key overhang on telcos, particularly BHARTI, as any aggressive investment, with limited near-term monetization possibilities, can add to their balance sheet woes. But the EMD disclosure has partly addressed the overhang of aggressive bidding, particularly from new entrants. We expect BHARTI to garner 18% EBITDA CAGR over FY22-24, even without building any earnings from forthcoming tariff hikes – a high probability in the next couple of quarters. With a compelling valuation of ~7x FY24E EV/EBITDA, we remain positive on BHARTI.

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