Telecom - Spectrum auction: Prudent investment by Bharti Airtel - ICICI Securities

Spectrum auction concludes on day 2 with six rounds. Operators have collectively bought 855.6MHz of spectrum with payout of Rs778bn. Bharti has bought 355.5MHz spectrum with total payout of Rs187bn (upfront payment of Rs70bn). It has completed Pan-India sub-GHz spectrum holding. It has also bought 900MHz spectrum in four circles where spectrum will be up for renewal in CY24. It has significantly added mid-band spectrum in Karnataka and TN, and has bought more 2,300MHz in circles where prices were reasonable. Though spectrum investment is higher than our estimate for Bharti, the investment has been at most prudent. Vodafone Idea (VIL) bought 11.8MHz spectrum with payout of Rs20bn (upfront payment of Rs6.8bn).

- Spectrum auction concludes. Spectrum auction concludes on day 2 with total six clock rounds. DoT has sold 855.6MHz of spectrum for a total payout of Rs778bn. The final spectrum price was equal to reserve prices across bands which was anticipated. 700MHz and 2,500MHz spectrum did not see any bid, and may likely see a significant cut in reserve prices in next spectrum auction. Operators have to make upfront payment of Rs276bn in the next 10 days; and two years' moratorium and then 16 annual installments with 7.3% interest rate.

- Bharti Airtel - spectrum purchase focus on filling gap in sub-GHz, and capacity spectrum.

* Bharti has overall bid for 355.5MHz of spectrum with total payout of Rs187bn. It is required to make an upfront payment of Rs70bn, and EMI of Rs14.6bn will kick in from FY24.

* It has invested Rs95bn on sub-GHz (800/900MHz band) for 48.9MHz spectrum. Bharti now has sub-GHz spectrum in all 22 circles, however it does not still have 5MHz spectrum (required for 4G/5G launch) in Gujarat and Kerala.

* It has bought spectrum in four circles where 900MHz spectrum will be up for renewal in CY24 - UP east, WB, Bihar and Odisha. This has led to an additional spectrum payout of Rs27bn.

* It has bought 800MHz spectrum in Maharashtra, Haryana, UP west and MP. This has helped Bharti fill sub-GHz gap at a reasonable investment.

* In 1,800MHz, Bharti has significantly scaled up spectrum holding in Karnataka and TN. It now has 4 carriers each in these two circles in 1,800MHz band, and one carrier in sub-GHz and two carriers in 2,100MHz band. These are Bharti's strong circles; and now it has total seven carriers in FDD. However, it has skipped adding 2,300MHz in these circles.

* Bharti has been prudent in 2,300MHz spectrum investment. It has skipped expensive circles such as Delhi, Mumbai, Kolkata, AP, Karnataka and TN. It raised spectrum holding to 40MHz in 13 circles in 2,300MHz band.

* With the conclusion of this spectrum auction, Bharti's net debt has increased to Rs1,340bn. Its net debt to EBITDA (Q3FY20 annualised after adjusting for Ind-AS 116) is 3.2x. Though net debt to EBITDA is within comfortable levels, absolute net debt is much higher than desired.

- Vodafone Idea (VIL) - Spectrum investment capped by limited requirement.

* VIL has total bid for only 11.8MHz of spectrum with total payout of Rs20bn. VIL will need to make an upfront payment of Rs6.8bn, and EMI of Rs1.6bn will kick in from FY24.

* It has bought 5MHz spectrum in 900MHz band in TN which was up for renewal; and 0.8MHz in WB.

* It has made solid 5MHz (in multiples of 5MHz) block of spectrum in 1,800MHz band in Karnataka, UP west and UP east.

* VIL has strong spectrum holding in mid-band (1,800/2100MHz) and has much lower data throughput. Thus, the spectrum requirement itself was very low and high leverage is also a big barrier for any generous investment.

Source : Equity Bulls

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