What Brokerages Think Of India’s Biggest-ever Telecom Spectrum Auction
Goldman Sachs says Bharti Airtel has maintained spectrum advantage after the auctions.
India’s largest-ever spectrum auction came to an end on Thursday, just 5 days after it began, with the government earning Rs 65,789 crore from the entire exercise.
Nearly 60 percent of the airwave put up on auction remain unsold, including the premium 4G band. The biggest spender was Vodafone India who will eventually shell out more than Rs 20,000 crores for all the spectrum it acquired.
Here’s what brokerage house have to say about the auction outcome.
High payouts damage return: Credit Suisse
According to Credit Suisse, competitive compulsions forced telecom operators to shell out a premium for spectrum in select bands, which will hurt older players in the market. 48 percent of the spectrum put up for sale got sold at premium of 5 percent over the reserve price, according to the brokerage house.
Such high payouts towards spectrum is a unique Indian phenomenon that damages returns immediately. Any potential upside from this will be limited by the entry of large scale operator Jio.Credit Suisse
The considerable amount of bids received in the 2500 megahertz (MHz) and 2100 MHz was a surprise, Credit Suisse added.
The high reserve price for 700 MHz band dithered telecom operators from bidding for the spectrum according to Credit Suisse.
In what is probably the only rational part of the auction, no bids were received in the premium 700 MHz band. These are likely to be sold at lower prices later, in our view.Credit Suisse
Bharti Airtel and Idea Cellular’s bids worth Rs 142.4 billion and Rs 128 billion crore makes them one of the highest debt-laden telecom companies.
Post the auctions, the leverage levels for the companies (Bharti Airtel and Idea) rise to 2.9/4 net-debt/EBITDA, respectively – making these amongst the most leveraged telcos in the region.Credit Suisse
The brokerage has maintained a cautious outlook on the country's telecom sector.
Growing competition a risk: Morgan Stanley
Brokerage firm Morgan Stanley said the competitive intensity in the telecom sector will take a toll on the companies’ earnings.
With rising competitive intensity, we believe the operators would not have the pricing power and tariffs would continue to be under pressure. Rise in capex, low FCF (free cash flow) and rising leverage puts balance sheets and earnings at risk.Morgan Stanley
The total bid amount was 65 percent higher than Morgan Stanley's estimate. The brokerage firm said that industry spending over the last two auctions of $27 billion and $10 billion was more than its revenue.
Bharti Airtel's decision to strengthen its foothold in the 2100 Mhz, 1800 Mhz and 2300 Mhz bands gave it an upper edge in Morgan Stanley's books.
We prefer BHIN (Bharti Airtel) and expect it to benefit from rising in spectrum footprint and operator capex.Morgan Stanley
Advantage Bharti Airtel: Goldman Sachs
Another brokerage firm that shared Morgan Stanley’s view was Goldman Sachs who said Bharti Airtel's decision to spend $2 billion on new spectrum will help the telecom operator maintain a lead over its rivals.
Post the auction, Bharti has maintained its spectrum advantage vs rivals and holds ~44% more spectrum on average vs Jio/Vodafone/Idea, and ~50% more 3G/4G spectrum vs Vodafone/IdeaGoldman Sachs
Bharti Airtel capitalised by filling its 3G shortcomings in Kerala while also buying additional 3G spectrum in four circles. This will give Bharti Airtel "considerable" data capacity, Goldman Sachs said.
Vodafone and Idea, however, failed to plug their 3G and 4G gaps, according to the brokerage house.
Neither of the above two players plugged all their 3G/4G gaps and instead consolidated holdings in many existing circlesGoldman Sachs
Goldman Sachs also believes a stabler debt level gives Bharti Airtel the space to make more spend more in non-spectrum expenditure.
Bharti’s debt levels are stable at around 2.5x FY18E net debt/EBITDA and we expect the company to continue to invest 20%-30% higher vs Vodafone/Idea on non-spectrum capex going forward to gain market share. Idea’s FY18E net debt/EBITDA levels are now close to 4x, with a spectrum portfolio still inferior to Bharti/Jio.Goldman Sachs
The brokerage sees a 19 percent potential upside to Bharti Airtel's stock.