Telecom consolidation: Who gains most from govt's spectrum cap decision?

Vodafone-Idea and Reliance Jio will be the key gainers of the government's decision to remove the cap on holding spectrum

The Narendra Modi-led central government on Wednesday decided to relax the cap on the amount of spectrum individual telecom service providers can hold and extended the payments tenure. The move will help ease the telecom sectors cash flow woes and aid the process of ongoing consolidation efforts.

Amid the pricing war in the sector, driven mainly by Reliance Jio’s disruptive run so far, the telecom market has shrunk from 15 players in 2011-12 to just four now – Telenor and Tata Teleservices have merged with Bharti Airtel, Reliance Communications is selling its assets to Reliance Jio, and Idea and Vodafone merging to unite forces.

According to the new rules, the overall spectrum cap in a circle will now be 35 per cent, against 25 per cent earlier. Further, the Cabinet decision will also replace the band-specific cap of 50 per cent with a combined spectrum holding cap of 50 per cent across the 700MHz/800MHz and 900MHz bands. Bharti’s spectrum portfolio currently stands at around 2,000 MHz, compared with 1,860 MHz for the combined Vodafone-Idea entity and 1,640 MHz for Reliance Jio-RCom combine.

The key beneficiary of the relaxed spectrum caps in addition to Jio will be the newly merged Idea-Vodafone combine. The merged entity under the earlier rules would have breached the spectrum cap in five circles – Gujarat, Haryana, Kerala, Maharashtra and UP West. Importantly, the breach would have been in the 900MHz band and the company would have had to return the spectrum in these markets without compensation from the government. Analysts at Deutsche say that the new rules would allow the merged company to retain its entire spectrum holding in these markets which will give it a substantial competitive advantage. Further, given the longer tenure of spectrum holdings, it will have the lowest renewal risk among peers, they add. The effective value of the higher cap at the last auction prices is pegged at Rs 70-80 billion.

The Cabinet also decided on extending the payment term for airwaves auctioned from 12 years to 16 years and this includes a two-year moratorium, to 16 years. This should help the sector, pegged back by industry debt of just under Rs 5 trillion and cash flow that is dwindling every quarter, given a sharp fall in tariffs. CRISIL Research expects the six-year extension to help the sector save about Rs 105 billion in 2018-19 and Rs 500 billion on a cumulative basis over the next four financial years.

While this is a relief, India Ratings expects free cash flow to remain negative for a second straight year, as non-spectrum capital expenditure to revenue ratio will remain at 25 per cent in 2018-19. This translates into a sector capex of Rs 500 billion on a revenue base of Rs 2 trillion. “The elongation of the deferred obligations on the spectrum would support the cash flow situation for telcos,” say analysts at the rating firm. While Bharti Airtel’s net interest coverage remained at 4.5 times for the first nine months of 2017-18, it deteriorated to 1.3 times for Idea Cellular during this period.

While these measures are positive, the Street will look for pricing-related action by Reliance Jio, especially the one where there is stability or an uptick in average revenue per user.