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Telcos may go Easy on Spectrum Bidding

Telcos Likely to Limit 5G Airwave Purchases in Upcoming Auction

Source: News article published by ET Bureau on January 18, 2024

Analysis of this News for a Layman

The Indian government periodically auctions wireless spectrum licenses to telecom operators. Spectrum refers to the radio airwaves over which mobile networks operate. An upcoming auction is scheduled around March 2023.

However, analysts anticipate subdued demand and selective bidding by operators during this auction compared to the previous one in mid-2022. This is because companies like Airtel, Vi, and Jio had acquired large portions of 5G spectrum bands last year, which remain unused as 5G networks are still being built.

With ample available spectrum and only modest license renewals due this year, telecom companies may choose to purchase small supplemental quantities instead of spending billions of dollars now, as 5G monetization is still in its early stages.

Telcos may go Easy on Spectrum Bidding

Impact on Retail Investors

For retail investors in telecom stocks such as Bharti Airtel and Vodafone Idea, the prospect of a less intense spectrum auction is positive news. Since spectrum acquisitions require significant capital outlays, telcos opting for measured purchases based on immediate business needs demonstrate financial prudence.

This approach helps conserve cash flows for 5G network expansion rather than overspending on spectrum licenses as 5G revenues are just beginning to materialize. It reduces the risks of a heavy debt burden or equity dilution in the near term, just as 5G revenues start to accrue. Investors can remain confident in the long-term wealth creation outlook.

However, the possibility of competitive dynamics leading to aggressive spectrum purchases cannot be ruled out entirely, but such a scenario seems unlikely based on initial indications.

Impact on Industries

The muted bidding expectations have a mixed impact across industries. Telecom equipment manufacturers may anticipate a moderation in capital expenditure by telcos in the short term. However, as 5G services continue to roll out, equipment orders are expected to sustain, albeit at a slower pace.

The slower expansion of 5G coverage due to lower spectrum purchases could slightly delay the adoption of advanced technologies like IoT, smart factories, and autonomous solutions in the Indian enterprise segment. However, this temporary restraint demonstrates financial discipline among telcos amid global recession concerns.

Long Term Benefits & Negatives

The conservative approach to 5G spectrum acquisition, as indicated by the bidding expectations, is strategically sound considering the long growth path ahead for 5G in India, with the technology still in its infancy in 2024.

This approach allows telcos to balance network investments with maintaining robust financial profiles during the early phases of 5G. Once 5G monetization plans, including enterprise services, fixed broadband substitution, and innovative offerings, take root by 2025 onwards, operators can reassess their spectrum needs and participation in future auctions.

The only risk is if competitive intensity unexpectedly flares up, leading to market share losses for a conservative player. However, such a scenario seems unlikely in the mature Indian telecom market dominated by three private players. There are adequate safeguards for long-term-focused investors, especially with winners like Airtel.

Short Term Benefits & Negatives

In the near-term perspective for 2023-24, the key positive for Indian telecom stocks stemming from a prudent bidding outlook is a margin of safety against high capital expenditures, funding uncertainties, and the risk of cash burn while scaling up 5G services.

However, depending on the spectrum purchased by rivals, competitive intensity in specific 5G coverage expansion areas may experience spikes, leading to higher capital allocation for a defensive telco. This poses the risk of margin pressures if the return on investments is delayed amid inflation concerns.

Nevertheless, continued subscriber gains, tariff hikes, and rising broadband adoption trends appear sufficient to offset any temporary concerns arising from telcos’ choices in the spectrum auction. Investors can consider buying stocks of telecom firms with strong balance sheets like Airtel in the event of volatility resulting from bidding strategies.

Companies Impacted by Muted Telco Participation in Spectrum Auction

Indian Companies Gaining:

  1. Infrastructure and Tower Companies:

    • Lower spectrum demand might shift focus towards optimizing existing infrastructure.
    • Companies like Bharti Infratel, Indus Towers, and GTL Infrastructure could benefit from increased investments in tower upgrades and network optimization projects.
  2. Telecom Equipment Manufacturers:

    • Deferred spectrum purchases could lead to longer equipment cycles and delayed upgrades.
    • Companies like Tejas Networks, HFCL, and Sterlite Technologies could see sustained demand for existing network equipment.
  3. Alternative Technology Providers:

    • Focus on rural coverage might open opportunities for alternative broadband technologies like satellite internet.
    • Companies like OneWeb, Jio Space Tech, and Hughes Communications India could see increased potential for rural connectivity projects.
  4. Government Finances:

    • Lower spectrum revenue in the short term could be offset by potential future demand due to growing data consumption.
    • This could provide the government with greater flexibility in spectrum use policy and development of the telecom sector.

Indian Companies Potentially Losing:

  1. Private Spectrum Auctioneers:

    • Low competition and limited demand could negatively impact companies like mjunction Services and MSTC Ltd.
    • Their revenue from auction services might decline if the sale is underwhelming.
  2. Spectrum-Focused Investment Funds:

    • Decreased spectrum purchases by telcos could limit investment opportunities in this space.
    • Funds invested in spectrum acquisition ventures might see lower returns or longer holding periods.

Global Companies Likely Unaffected:

  1. Global Telecom Equipment Giants:

    • The muted Indian auction is unlikely to significantly impact major players like Ericsson, Nokia, and Huawei.
    • Their performance primarily depends on global market trends and regional contracts.
  2. Satellite Broadband Providers:

    • While alternative technologies might gain some traction, the impact on major satellite operators like Iridium and SES may be limited.
    • Their focus is often on broader markets and niche applications beyond terrestrial telco networks.

Please note: This analysis is based on the available information and is subject to change based on future developments. It is not intended as financial advice, and you should always consult with a professional before making any investment decisions.

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