3G Auctions in India – Fair Price of 3G License

3G Auction in India3G auctions finally took-off on 9th April after many delays and postponements. Government expects $7-8 billion from the 3G and BWA auctions and if the last 15 days are any indications, then the collections from the auctions are going to exceed the expectations. As on 27th April, the pan India license if for a premium of 147% at $1.92 billion (base price was $782 million). The auctions in all the circles would remain open till there is excess demand in any of the circles to maximize Government’s revenues. The question to be asked is where would the carriers stop bidding and what is the fair value for a pan India license?

Background:

There are around 14 operators in each of the service area in the country. The high competitive intensity has led to a tariff war with the realized rate dropping below 1 cent/min making India the cheapest country in the world when it comes to mobile telephony. Out of 14 operators, almost 50% are new operators which are still in the process of launching 2G networks and have a combined market share of less than 10%. The presentation below provides a good overview of the Indian Telecom Market.

The Government of India started the process of auction of 3G and BWA airways on 9th April with an objective of garnering $7-8 billion and has set the base price of a pan India 3G license at $780 million. There are 4 slots available in all the circles except for Punjab, Bihar, Himachal, J&K and West Bengal where there are 5 slots available. One of the slots in each circle has already been awarded to the state owned company, BSNL (MTNL in Delhi and Mumbai) so effectively there are 3 slots for auction in most of the circles.

What are the analysts estimates?

Many of the top equity analysts and investment bankers have estimated that the operators are going to bid around $2 billion for a pan India license. The table alongside shows that analyst views on the 3G auction price for pan India license. The analysts have based their claims on high data revenues from 3G.  Motilal Oswal has assumed non voice revenues of 20% of total revenues by 2015 and 12% annual growth in wireless revenues for next five years. In the last few quarters, due to competitive tariffs, the operators have seen negative revenue growth and I do not see the wireless revenues to grow at 12% CAGR for five years. Similarly, BNP Paribas has assumed the data ARPU to be Rs 100 which is very high considering it is close to Rs 18 currently. Is there any killer 3G application that would increase the data ARPU? I do not think there is any application that cannot run on 2G networks. No doubt the experience would be much better but the country is yet to adopt the mobile internet. So expecting the data usage to shoot up significantly with 3G would not be right.

The latest 3G auction bid value can be accessed from the DOT Website.

Will the operators buy the analyst argument?

They have no choice but the get the spectrum. There are four serious bidders for the pan India license and there are only 3 slots available. The cost of not getting the 3G spectrum is high due to the following reason:

  1. High congestion: In most of the metro and A circles, the networks of the leading operators are choked due to spectrum constraints. The operators are likely to use the 3G spectrum for voice thereby reducing congestion on 2G airways. The availability of higher amount of spectrum would also help the operators reduce their capital expenditure (CAPEX). In my opinion, the operators are not bidding to launch high speed networks but are bidding to get as much spectrum as possible.
  2. Service Differentiation: Currently, there is very little differentiation amongst the operators and with the mobile number portability (MNP) round the corner, no operator can miss the opportunity of becoming a differentiated player using 3G.
  3. Higher Data Usage: Operators are hoping that better experience on mobile internet is likely to drive the data revenues. With the 2G network becoming less congested, even the GPRS experience is likely to be much better. I believe that there is a potential to increase the data revenues to 15% of total revenues in the near term but not to the levels that some of the analysts are projecting.

What would be final auction price for pan India license? It is clear that no big incumbent operator can afford to be bow out of the 3G and they will try to get the spectrum at any cost till the time their balance sheets are able to support the license fee. The operators would need to fund the 3G license fee as well as fund the rollout of 3G networks. This would result in higher debt on their balance sheets leading to higher debt to equity ratio (leverage). This means that the ability to fund the 3G license and the networks would vary from operator to operator depending on the current levels of debt. As per the analysis of BNP Paribas, the debt to equity and debt to EBIDTA levels pre and post 3G license acquisition would be as follows (assuming $2 billion as the cost of 3G license): 3G Leverage for operators in India

Bharti has negligible debt but after the acquisition of Zain, its balance sheet would soon get $10.7 billion as debt but still it would be in a better situation than Reliance and Idea to be able to fund the $2 billion 3G license cost. In case of Reliance and Idea, the net debt to EBIDTA becomes abnormally high which makes me believe that at some stage they would walk out of the bidding for pan India license and would concentrate on getting the licenses in circles where they are strong. Vodafone and Tata Docomo would be able to fund their 3G aspirations due to availability of funds from Global organization for Vodafone and from Docomo for Tata. This means that the fight would be amongst Airtel, Vodafone and Tata to get the pan India license but the other players especially Reliance and Tata are going to drive the price in a few circles to an unsustainable levels. This means that the pan India license would finally cost around 2 billion to the operators.

Is $2 billion fair price for 3G license?

It is difficult to say if $ 2 billion is the fair price or is the 3G license overpriced in India. It would all depend on the data take up by consumers and the operators ability to price the service in a way that they are able to maximize the 3G subscribers on a base station. This means it would be in the interest of operators to keep the tariff low to gain consumer traction and limit the geographic expansion till there is a strong business case to do so. This would help bring down the CAPEX. The analysts have been talking to the operators on the possible license cost and have been spinning the business case around the $ 2 billion mark by playing with assumptions around data uptake and ARPU/wireless revenues. I am sure the Indian operator would not be looking at data as the only driver but would apply the “Minute Factory” model to 3G as well. This would ensure mass adoption of 3G in the country as it happened in case of 2G.

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