Ronnie05's Blog

Indian Telecom Story (Part XXXa): 3G a near reality

Posted in Industry updates by Manas Ganguly on May 20, 2010

After 4 years of delay, 34 days and 183 rounds of frenetic the Great Indian 3G auction has been a Great Big Fat Success. The proceeds of Rs.67,719 crore raised by GoI on higher-than-expected 3G mobile spectrum sale inflows could lower the government’s borrowing by up to Rs35,000 crore ($7.6 billion) in the 2010-11 fiscal year from estimates of Rs4.57 lakh crore ($99.3 bn). The government is likely to garner an additional Rs 12,000 crore from BWA auction.The notional value of a pan-India slot amounted to Rs16,828 crore, almost five times the reserve price of Rs3,500 crore. GoI fiscal deficit is slated to slide down to 5% from the existing 5.5% from the proceeds of the spectrum auction.

This post examines the views in the industry and otherwise debating viabilities. In an earlier post, I had written about how and why 3G would not be a viable alternative for enterprises.

Disturbing Balance Sheets
The unexpectedly high bids mean that companies have to raise a huge amount of cash to pay for licences, after which they will have to find more funds to buy equipment and roll out services. Operators that have won spectrum will have to pay for it within the next 10 days. Companies will have get rid of some of their assets to pay for 3G.
Airtel’s debt to equity ratio after factoring the cossts of 3G Spectrum acquisition stands at 2.3X while the debt to equity for Idea and Rcom was 3.5X.

Ten years back, European 3G auctions led to a similar bidding frenzy that left telecom operators with broken balance sheets and battered share prices. Telcos are expected to make money on their 3G spectrum only after 4 or 5 years.
The net margins of operators that have acquired 3G spectrum will be strained over a longer period of three to four years. This will be because of increased capital charges (the interest outgo on account of debt raised for 3G network rollout, and the amortisation of 3G spectrum charges). This would place additional pressure on operators’ bottom lines. Estimates by CRISIL for 3G investments at this level by any operator to be value-accretive, the operator will need to garner a total of 2.5 crore 3G subscribers by the fifth year, and charge an ARPU (average revenue per user) premium of 35% over 2G services. By 2013-14, a 3G operator that would enjoy a 500-700 bps advantage in EBDITA margins over one that does not.

Dawn of Industry Consolidation
3G services would be margin-dilutive in the near term, but could eventually lead to a significantly higher margins. Over the longer term, the availability of 3G spectrum can be a game-changer by catalysing consolidation in the telecom industry. For Telcos already battling a savage price war@, the end of the process marks the start of possible consolidation activity or network sharing pacts between operators as losers look to plug service gaps to prevent customers from jumping ship. Given that no single player has acquired pan-India 3G spectrum, the process of industry consolidation would be hastened. The significant pressure on profitability, and the need to gain scale, could induce players without 3G spectrum and new entrants to actively look to merge

to be continued

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