Increased payouts for auctions may force telcos to raise call rates by around 10%: Morgan Stanley

Kolkata: Acute scarcity of 900 MHz airwaves in the upcoming auction will lead to over-bidding and could drive up the winning price of this premium bandwidth to as much as four times the February sale price of 1800 MHz spectrum, which would force telcos to raise call rates by around 10%, said Morgan Stanley.
“900 MHz spectrum, typically, allows for lower capex and higher EBITDA margins, but due to its limited availability, we could see overbidding, which is why we are raising spectrum payout forecasts for 900 MHz from three times to four times the February ’14 market price of 1800 MHz airwaves,” Morgan Stanley analysts said in a recent note.

As a result of the increased payouts for the auctions, the brokerage expects operators to raise tariffs by 10%, post the sale. “With 4 trillion industry minutes, another 2-3 paise tariff hike will take care of the increase in interest and depreciation costs for the upcoming auctions,” Morgan Stanley analysts said in a note to clients.

In the run-up to the auctions – which are tentatively slated for February 2015 -- the US investment bank has downgraded No. 3 telco Idea Cellular and fourth largest Reliance Communications (RCom) but stayed overweight on market leader Bharti Airtel.

“Airtel is best poised for the next auction” as it is well covered with 1800 MHz and 2100 MHz spectrum in the six circles where it faces 900 MHz renewals, unlike Idea Cellular, Vodafone India and RCom, which are not so well covered with such fall-back airwaves, it added.

The house attached the “highest risk” to Idea since it says that a whopping 92% of the No 3 telco’s 900 MHz holdings will be on the auction block, while it is more optimistic on Bharti Airtel as only 42% of its 900 MHz band holdings are up for renewal.

Its lower rating for RCom, in turn, is on the grounds that the telco’s “operating matrix is among the weakest” amongst incumbents going into the next airwaves sale.

The brokerage has linked the downgrade of the Anil Ambani company to “spectrum risks, expensive valuation and lower EBITDA growth among its peers”.

The brokerage’s forecast comes on the heels of the telecom department’s plans to hold a two-stage auction, initially 2G airwaves next February (across 800 MHz, 900 MHz and 1800 MHz bands), followed by another airwaves sale of 3G and the 4G bands in May. India's top four mobile operators -- Bharti Airtel, Vodafone India, Idea and RCom -- had sought deferral of the auction till sufficient additional airwaves across bands are available for sale. Even the sector regulator had last month urged the government not to conduct a spectrum sale unless more bandwidth across various frequencies and across India is available.

But the government is in no mood to play ball since it has budgeted a revenue of Rs 9,355 crore from the sale of 2G bandwidth this fiscal year.

According to Morgan Stanley, demand for 800 MHz spectrum would hinge on the quantum of contiguous 5 MHz blocks auctioned and on whether the government treats such bandwidth as extended GSM (EGSM), and clubs it with the premium 900 MHz band.

“Key to how fruitful the 800 MHz auction will be depends on (government) allocating frequencies to EGSM, although we believe this option is a low probability at this stage,” said the brokerage.