Bookmark and Share

India’s Telecom companies face “Winner’s Curse” in savage 3G Spectrum Bidding

4 Comment

India’s Telecom Market is a unique market in a lot of ways.The differences are

  1. Second Largest Potential Market in the World
  2. Cheapest Rentals in the World
  3. HyperCompetitiveness with 12-13 players compared to 3-4 in most other markets
  4. One of the highest population teledensities making spectrum a scarce resource
  5. Very Low ARPU’s due to low per capita income
  6. Fastest Growing Market in terms of subscribers added per month

The severe competition in the Indian market makes surviving and making profits a tough task for almost all the companies except for a few.Bharti due to its first mover advantage is India’s largest telecom company with a relatively better balance sheet than other companies.The other big players are state owned BSNL,Vodafone,Reliance,Idea and Tata-DoCoMo. There are also a number of smaller regional players and national wannabees.With even 2G spectrum scarce , voice quality is poor and leads to frequent dropped calls.Before the 3G spectrum auction was started , a cutthroat price war was unleashed by new entrants like DoCoMo,MTS and Aircel.This led to a sharp fall in revenues and margins for all companies leading to severe underperformance of the telecom sector compared to the broader stock market.

The 3G auction has become a bigger problem for the companies as buying spectrum becomes imperative for the larger companies to defend their market positions.This had led to a price bidding war resulting in auction prices which are far ahead of the government’s and analyst expectations.This will also severely impact the balance sheet which is already heavily leveraged  by the sharp capex expansion in the previous years.The large outgo of cash for the spectrum promises to be a “Winner’s Curse” for some of the companies with heavy debt on their balance sheet.

India 3G Sale ‘Out of Hand’ as Bids Top $12.5 Billion – Bloomberg

Vodafone Group Plc and Bharti Airtel Ltd. are among eleven companies that will pay more than $12.5 billion for high-speed mobile data licenses in India, fueling concern they won’t recoup their investments.

The auction for 93 licenses to bring data at third- generation speeds to India’s 586 million mobile-phone users may end as early as this week, according to analysts including Rohit Chordia. Based on prices at the close of today’s bidding, a company winning a license in each of 22 telecommunications zones would pay 140 billion rupees ($3.1 billion) for permission to operate a nationwide network, said Satyendra Prakash, spokesman for India’s department of telecommunications.

Internet usage may not be enough to offset the cost of the licenses for providers including Bharti and Japan’s NTT DoCoMo Inc. in a market where monthly phone bills are about $5 per user, or about the same as a basic New York City MetroCard. Revenues have declined as price competition has pushed call rates to lower than a penny a minute, while Bharti said this month only 5 percent of Indian subscribers currently use smartphones.

“It seems to me that these guys are overpaying, that it’s getting out of hand,” said Saeed Baradar, an analyst at Societe General SA in London. “In India, with the rural population so significant, with voice being such an important part of revenue, well, at $2.8-$3.0 billion, you’re really starting to stretch yourself.”

Bids by Internet

Bidding started April 9 in an anonymous, Internet-based auction two years after the government first announced plans to sell the airwaves. The auctions will end when each of the local telecommunications zones have the same number of bidders as available licenses.

India’s government could trim half a percentage point from a deficit estimated at 6.8 percent of gross domestic product for the last fiscal year based on a projection of 350 billion rupees in auction proceeds, Nomura Holdings Inc. estimated in February. Since then, Minister for Information Technology and Telecommunications Andimuthu Raja had predicted the auction could reach 500 billion rupees. Bids exceeded that upper estimate May 7.

Bharti, Vodafone’s India unit, Aircel Ltd., controlled by Malaysia’s Maxis Communications Bhd., Idea Cellular Ltd., DoCoMo’s Indian partner Tata Teleservices Ltd., and a Reliance Communications Ltd. subsidiary put up 5 billion rupee deposits each on March 19, indicating an interest in all 22 zones.

Shares Decline

Shares of Bharti, India’s largest phone company by subscribers, fell 3.3 percent to 284.7 rupees at close of trading in Mumbai today. They’ve lost 9 percent since the auction began in April, while Reliance Communications has lost 16 percent, and Idea 12 percent. That compares with a 3.3 percent decline for the benchmark Sensex index in the same period.

More on this topic (What's this?)
Indian Market Welcomes Hedge Funds
Ramblings Jobs: GTT
Ramblings Jobs: Two More From Lightower
Read more on Investing in India, Telecommunications, 3G at Wikinvest
PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.