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DoT Slashes Auction Target, but Revenue Receipts to be Robust

Impact of DoT’s Spectrum Auction Revenue Cut

Source and citation: Information adapted from an ET Bureau article published on January 24, 2024.

Analysis for Layman

The Department of Telecommunications (DoT) has significantly reduced its expected revenue from the spectrum auction scheduled for March 2023 to just ₹500 crore, down from the previous estimate of ₹5,000 crore. This sharp reduction is due to telecom companies like Airtel and Vi having already acquired the 5G airwaves they need in the previous year, resulting in limited demand for additional spectrum.

Although over ₹97,000 crore worth of spectrum will be officially available for sale, it is expected that operators will primarily seek to renew expiring bandwidth permits rather than make new purchases. Airtel and Vi are likely to spend approximately ₹4,200 crore and ₹1,950 crore, respectively, for renewal purposes. Jio, on the other hand, has no renewal requirements this year, following its significant 5G acquisitions.

Despite the muted expectations for the spectrum auction, DoT still anticipates overall fiscal revenue of ₹85,000 crore for the year when accounting for regular licensing fees, spectrum usage charges, and prior spectrum installment dues.

DoT Slashes Auction Target, but Revenue Receipts to be Robust

Impact on Retail Investors

For investors in Airtel and Vi, the low expenditure on airwave renewal is positive news. It indicates that these companies are now focusing on upgrading their existing network infrastructure for 5G deployment, rather than making additional spectrum purchases. This shift allows them to allocate their capital expenditure towards localizing network equipment through vendor financing, rather than spending on overseas spectrum acquisitions.

Both telcos can utilize their free cash flow to strengthen their balance sheets, potentially through debt refinancing at lower interest rates. Retail investors should keep an eye on whether any unused spectrum held by telcos is sold to competitors or new entrants, which could generate liquidity.

For Jio investors, the lack of spectrum renewal further solidifies the company’s dominant position in the market, as it already holds significant 5G airwaves across various bands. Retail investors can expect Jio to continue focusing on subscriber engagement through the rollout of next-generation services.

Impact on Industries

The muted expectations for the spectrum auction signal the maturity of India’s telecom market, especially after the recent 5G migration. Major telecom players already possess sufficient spectrum holdings to meet their medium-term requirements.

This certainty allows network equipment vendors to plan their capital expenditure more effectively, focusing on equipment, towers, and fiber for the densification and localization of 5G networks. Telcos will continue to prioritize cash conservation through vendor financing options.

Manufacturers can correspondingly plan their production capacities around the scale-up of 5G infrastructure, particularly in areas like software, antennas, routers, semiconductors, microprocessors, sensors, and IoT modules.

Overall, a sustainable and focused approach to network spending that aligns with monetization pipelines is beneficial for the long-term health of the telecom sector.

Long Term Benefits & Negatives

The light 5G footprint by Indian telcos, combined with their ample holdings of future-ready spectrum, is positive in terms of long-term resource utilization. Telcos are now well-prepared to support the technological advancements of the next decade, such as 6G and advanced IoT.

Moreover, measured capital expenditure can help lower the risk of excessive debt accumulation, credit rating downgrades, or covenant breaches during market slowdowns. This stability incentivizes the maintenance of sector health.

However, for gear makers, there is a risk of extreme demand bunching if telcos synchronize major technology upgrade cycles after prolonged periods of minimal modernization. Nevertheless, competitive dynamics may drive regular improvements.

In the long run, policy reforms related to spectrum trading, sharing, and surrender can enable more optimal redistribution. Funds generated from disinvestments by certain telcos could support emerging niche use cases, such as private 5G networks for enterprises and Industry 4.0 applications.

Short Term Benefits & Negatives

In the short term, the DoT’s lowered revenue expectations provide investors with visibility regarding modest outflows from telcos in 2023-24, primarily for the renewal of select expiring airwaves. This allows telcos to allocate capital more immediately toward the enablement of 5G networks and services.

Vendors in the telecom industry can plan their production capacities based on modernizing existing sites rather than focusing on mass network expansions. However, cash constraints at telcos mean that vendor financing terms will likely prevail to secure deals.

Nonetheless, the negligible auction proceeds for the government could pose a risk to expansion plans for programs like BharatNet digitization, potentially affecting execution timelines. Adequate allocation from the Universal Service Obligation Fund may be required to bridge these gaps.

Overall, lower spectrum sale revenues seem justified for now, considering the substantial spectrum auctions held over the past two years. The priority for the sector is profitability recovery rather than taxes at this stage of maturity.

Companies Impacted by DoT’s Auction Target Reduction:

Indian Companies Likely to Gain:

  • Bharti Airtel (BHARTIARTL.NS): Airtel needs to renew airwaves worth only ₹4,200 crore, considerably lower than the earlier target. This reduced expenditure could improve their finances and possibly lead to higher capex for network expansion or debt reduction, boosting investor sentiment.
  • Vodafone Idea Ltd. (IDEA.NS): Similar to Airtel, Vi’s renewal cost also stands at a manageable ₹1,950 crore. This reduces financial pressure and frees up resources for network upgrades or debt servicing, potentially attracting positive investor attention.
  • Bharat Heavy Electricals Ltd. (BHEL.NS): BHEL manufactures telecom equipment, and a potential increase in network upgrades by Airtel and Vi could benefit them through increased orders. A positive outlook on the telecom sector could also improve their market sentiment.
  • Telecom Infrastructure Providers (Tower Companies): Reduced pressure on telecom operators could translate to lower rental costs for towers in the short term. However, long-term growth might be impacted if the overall sector slowdown persists.
  • IT and Software Services Companies: The need for network upgrades and potential optimization efforts by telcos could create opportunities for IT and software services companies, benefiting players like Infosys (INFY.NS) and TCS (TCS.NS).

Indian Companies Likely to Lose:

  • Government of India: The revised auction target implies lower revenue intake for the government compared to initial estimates. This could impact planned infrastructure spending and fiscal deficit targets.
  • State-owned BSNL: While BSNL receives some relief on adjusted gross revenue dues, the overall slowdown in the sector could limit its potential for growth and market share gains.
  • Spectrum Equipment Manufacturers: Companies like Tejas Networks (TEJAS.NS) and Tata Elxsi (TELXSI.NS) that manufacture spectrum equipment might see muted demand due to the reduced auction size.

Global Companies:

  • Global Telecom Equipment Manufacturers: Nokia (NOKIA.HE), Ericsson (ERIC.B), and Huawei could see reduced demand for their equipment in the Indian market due to the smaller-scale auction.
  • Global Investors in Indian Telecom Sector: A slowdown in the sector could dampen investor sentiment, potentially impacting foreign holdings in Indian telecom companies.

Note: These are potential impacts based on the available information. Actual outcomes might differ depending on various factors not covered in this analysis.

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