4G has India's Telcos running Around in Circles

4G has India's Telcos running Around in Circles. India's telcos are piling on the debt in order to compete in 4G.

Economic Times reports that Reliance Jio Infocomm's move to offer free voice calls and cheap data will force telcos to review their strategy for the upcoming auctions, say experts. While there will be a temptation to bid conservatively to preserve cash for the inevitable price war triggered by Jio's aggressive tariff plans, analysts say Idea Cellular and Vodafone India will have no choice but to bid aggressively for 4G data airwaves, if they are to compete with Jio, in the upcoming auctions scheduled to take place next month. A government official expects bidding intensity for 4G airwaves to increase in the upcoming sale. Idea has 4G airwaves and services in 10 of the country's 22 circles while Vodafone has 4G airwaves in 9 and services in 8. Vodafone will launch 4G in West Bengal, its ninth circle, by the year-end. 

In comparison, both Airtel and Jio have a pan-India presence. "India will rapidly switch to 4G and any operator incapable of competing in this segment is doomed to eventual failure," brokerage Bernstein Research Securities in a note released post Jio's launch plans announcement.   It added that Vodafone and Idea "will close a lot of these spectrum gaps in the auction scheduled to start at the beginning of October," a view backed by IDFC Securities who expects both to bid "aggressively". Vodafone and Idea didn't respond to emailed queries. 

While still contributing around 75% to revenue, growth in voice services is slowing for telcos. As 4G prices come crashing down, high-speed data usage will increase substantially, making it imperative for telcos to acquire these airwaves. JM Financial expects Idea to spend Rs 4,000 crore more than its initially estimated Rs 11,600 crore in the upcoming sale, but doesn't have any estimate for Vodafone. Idea's interest cost surged almost 185% in the April-June quarter while its net debt stood at Rs 37,660 crore as on June 30. Unlisted Vodafone India's standalone net debt for financial year 2016 is around Rs 81,500 crore. 

Analysts expect a 20-25% drop in voice and data realisations of the incumbent telcos over the next few quarters. Former Airtel CEO Sanjay Kapoor said Jio's entry will impact margins of telcos by 3-4%, making it that much more difficult to raise funds. At the same time, they will have to spend money not just in bidding for airwaves but also in upgrading their networks, investing heavily on backhaul fibre, in building capacities, and in the "IPfication' of their capacities. "If they (Vodafone and Idea) want to be here in this market for a long term, then they will have to go out and buy more 4G spectrum," said Kapoor. 

The government has scheduled the largest-ever sale of bandwidth to commence from October 1. The estimated value of airwaves to be sold in the auctions is over Rs 5.60 lakh crore, if all airwaves on offer are sold at base price.  Rajan Mathews, the director general of the GSM industry body, Cellular Operators Association of India (COAI), said that "some operators" will have to bid more to be able to compete with Reliance Jio on a complete IP network. He didn't name the telcos. Kapoor added that since market leader Bharti Airtel had already built its capacity in the last few auctions, it had the luxury to bid selectively. "They can decide to simply refarm their 2G (1800 MHz) spectrum to 4G. They don't have to take as hard a position in these spectrum auctions," he said. Citi Research analysts said Idea's initial reluctance on 4G leaves it exposed not only to Jio but also Bharti. "Not only is its spectrum inferior to Bharti (3G and LTE) and Jio (LTE), but we believe its stretched balance sheet leaves little room to meaningfully increase capex to offset the spectrum disadvantage," said a Citi Research report.


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