Teji Mandi: Spectrum auctions -  how company-specific actions unfolded during this event and their far-fetching impacts

Recently concluded spectrum auctions received better than expected response from the telecom companies. Spectrums worth Rs 77,814.80 crore were bought with Reliance Jio emerging as the biggest buyer.

Jio extended its own sub-GHz footprint meaningfully by providing for the expiring bandwidth. It has enhanced its capacity in 1800/2300 MHz bands across all circles. Bharti Airtel has also utilized this opportunity to cover gaps in coverage as well as capacity in 19 out of 22 circles. VIL acquired modest capacity in five circles only.

Here is the company-specific impact of the recently concluded auctions

Bharti strengthens its position, but rising net debt adds to the worry :

Bharti Airtel has acquired 355.45 MHz of spectrum across sub-GHz, mid-bands, and 2300 MHz in 19 out of 22 circles. Out of the total consideration of Rs 18,700 crore, the company will be required to pay nearly Rs 7,000 crore upfront. The remaining Rs 11,700 crore to be paid over 16 equal annual installments at an interest rate of 7.3% per annum.

As a Motilal Oswal report noted, this would increase its spectrum capex by 44% in FY22E and would reduce its free cash flow to Rs 1,260 crore v/s Rs 7,500 crore earlier. Its net debt would increase to Rs 1,66,100 crore from Rs 1,47,400 crore at present.

During this auction, Bharti purchased 16.25MHz spectrum worth Rs 3,000 crore in four circles – Haryana, MP, Maharashtra, and UP West – in the 800MHz band. Post this, Bharti now has a pan-India spectrum in the sub-GHz band. It will help in improving coverage in urban areas and expand coverage in rural areas. And, enhance its potential to cater to additional 9 crore customers. It has also enhanced its presence in 1800 and 2300 MHz bands. It will expand its potential service capacity.

Jio goes aggressive; expands the footprint:

Jio has acquired 488.35 MHz of spectrum in 800 MHz, 1800 MHz and 2300 MHz across all 22 circles. For a cumulative consideration of Rs 57,100 crore, the company will be required to pay nearly Rs 19,900 crore upfront. The remaining amount of Rs 37,200 crore to be paid over 16 equal annual installments post two years of moratorium. The effective interest cost will be 7.3% per annum.

This would increase its spectrum capex by 103% in FY22E and reduce its free cash flow to Rs 42,000 crore vs Rs 13,300 crore earlier. Its net debt would increase to Rs 47,600 crore in FY22E vs current expectations of Rs 18,900 crore. However, this should be easily manageable for Jio with the amount received through stake sales recently.

During this auction, Jio renewed higher spectrum in most metro and A circles (Delhi, Mumbai, Maharashtra, Kerala, Karnataka, Kolkata, Tamil Nadu, and West Bengal). Some circles witnessed lesser interest (Gujarat, Punjab, UP East, and UP West).

With this, Jio’s overall owned spectrum holdings have increased to 1,717 MHz with the average life rising to 15.5 years now. It will also help Jio to improve its services. Its services have deteriorated in recent times due to higher utilization of existing capacities.

Voda-Idea forced to remain low profile :

VIL's participation was muted as it acquired a modest 11.8 MHz of spectrum to cover minor gaps in five circles for a total consideration of Rs 1,990 crore. VIL has carried a large spectrum holding in the past. But now, due to the aggressive spectrum purchase from rivals, their spectrum assets are now at par with VIL.

Despite holding a healthy spectrum portfolio, VIL's highly leveraged balance sheet is proving to be a major constraint. The company is lagging behind other operators in terms of building network infrastructure. Post this spectrum auction, other operators will go for expanding their capacity. It will further weaken VIL's position.

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