3G, the much debated technology underwent the historic auction this April. Lots of political happenings deferred the auctions however when it happened; history got created in the Indian telecom industry. These auctions have raked in a whopping INR 70,000 crores (USD 15.1b/GBP 10.22b) for the government, battling with a 16 year high fiscal deficit. Auctions were closely watched by the whole of India as it had something or the other for every segment. If it had better quality data transfer for subscribers, it had the wand which could reduce the fiscal deficit for the government. It was nevertheless a battle of supremacy between the giants like Bharti, Reliance and Vodafone which was about to change the industry scene forever.
The cause of excessive interest in 3G bidders
It had to keep companies on their toes as the nation, presently having 601 million wireless subscribers, is still growing at a stupendous annual growth rate of 48.9%. 3G technology is slated to make subscribers richer with high-speed internet, videoconferencing, interactive gaming etc. As a result of which the usage of data value added services are slated to increase in the near future. Presently, the Data and internet services are being used by 29% as per the Telecom Regulatory Authority of India (TRAI) report, Dec 2009. However, the revenue from this stream accounts for a lowly 10% of the total operator?s revenue against the developed countries? average of more than 30%.
India?s revenue from this stream is expected to grow to 18% by the end of this year. This contribution still is way less as compared to the Developed countries and south eastern economies. The contribution of data VAS to the total Average Revenue per User (ARPU) is increasing continuously and is now stands at 30% for the US. It is expected to get past 35% by the end of this fiscal.
This huge gap suggests that there lies immense opportunity in the Indian market. An industry which is adding subscribers at 3% per month gives a huge market to the auction winners to tap in. The data VAS offers the additional market of the size of a huge USD 6b/GBP 4.06b in the near future. No wonder, companies would go for the fierce bidding.
Auction – A boon or Bane?
Auctions for 22 circles ended after the intense bidding for 34 days. Auctions were supposed to rake in a huge INR 35000 crores (USD 7.55b/GBP 5.11b) which could reduce the current fiscal deficit. However, the aforementioned opportunities in this sector had other plans as the base price for all circles touched the roof. As a result the sales of 3G licenses have made government richer by staggering USD 15b/GBP 10.05b, double the expected amount. It will undoubtedly, reduce the fiscal deficit heavily from the present value of USD 97.75b/GBP 65.49b. This, in addition to the BWA (Broadband auctions), can even reduce the estimated deficit target of 5.5%, from a very high 6.9%, by a 100 basis points to 4.5% by the end of this fiscal.
However, there is a darker side too. This process will suddenly suck out INR 70,000 crores (USD 15.1b/GBP 10.22b) out of the Indian market in a jiffy. Besides that the advance tax collection of INR 30,000 (USD 6.47b/GBP 4.38b) Crores will also put a lot of pressure in the liquidity in the Indian market. In a surprise move by RBI, when it increased both repo and reverse repo rate by 25 basis points, additional INR 20,000 crore (USD 4.31b/GBP 2.92b) have gone out of the market too. This sudden outflow can also put pressure on the interest rates as the short term lending rates may go up in near future. It may have come at the wrong time when IIP has grown by a strong 17.6%.
However, all depends on how Govt. invests the amount that it is going to get from these players.
Impact on telecom Companies
The biggest impact is going to be on two govt. companies MTNL and BSNL for surely. These two state run organizations got the head start which they could not capitalize. Now, they would be paying the price equal to the highest big of that particular circle. MTNL operates in both Delhi and Mumbai, circles which got the highest bids of INR 3316 crores (USD 713.93m/GBP 482.14m) and INR 3247 Crores (USD 699.07m/GBP 472.11m) respectively. The total amount of these two circles for each of them to pay would be INR 6543 Crores (USD 1.4b/GBP 0.95b). The biggest question is how MTNL is going to pay its liabilities when it showed a loss of a whopping INR 2514 Crores (USD 541.26m/GBP 365.53m) in 2009-10 as compared to a profit of INR 211crore (USD 45.42m/GBP 30.67m) in 2008-09.
Fund raising from the market will leave telecom companies? balance sheet in a bad shape. Their debt/EBIDTA ratio (dynamic measure of company's leverage) will increase and this will expose companies? to the risk of downgrading of their ratings. S&P has already lowered Bharti Airtel's.
Telecom industry has seen furious price war in the past which doesn't look like going southwards very soon when BSNL launches its 3G at 30paisa per minute. The competition is going to be fierce in the coming months. However, the war may take a halt after some time when total no of operators will be converged to 4-5 against the present 10-12 operators as the auction winners will take over the losers for that circle. It may restrict the increasing decrement in the ARPU. A sigh for telecom operators!!!
With huge competition across all the circles and the ever increasing price war, will companies be able to justify the cash outflow of INR 70,000 crores (USD 15.1b/GBP 10.22b) in a flash for the spectrum? It will depend on how companies launch the much awaited service effectively. Rest, time will tell.
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