Fitch reports on new spectrum pricing

VARINDIA- INDIA'S FRONTLINE IT MAGAZINE

 

According to Fitch Ratings, India's new spectrum pricing will drive consolidation in the telecom sector and lead to higher industry tariffs. The agency continues to have a Negative Outlook on the sector, due to ongoing regulatory uncertainty.

India's Union Cabinet last week decided to set the reserve prices for 5Mhz of second-generation GSM and CDMA spectrum at USD2.5bn and USD3.2bn, respectively. The 2G spectrum is offered at a nominal price, or with no upfront-fees on a "first come first served" basis, by Indonesia, the Philippines, Thailand and South Korea.

We expect that many of the telcos whose licences were cancelled by India's Supreme Court in February 2012 will not participate in the re-auction, as most telcos have a stretched balance sheet. Furthermore, the cabinet decision did not provide any relief on spectrum usage charges (SUC), which were left unchanged at the existing levels of 3%-8% of adjusted gross revenues.

We believe that India's telecom sector can afford six profit-making operators at the very most. High spectrum pricing will hasten industry consolidation, and will most likely result in higher tariffs which could be initiated by the largest operators. However, higher tariffs may not be sufficient to offset the negative affects of higher spectrum prices, as the sector will remain competitive with the six operators.

The Indian subsidiaries of Telenor and Sistema ('BB-'/Stable) are most likely to pull out either completely or in part. Fitch notes that the larger operators like Bharti Airtel ('BBB-'/Negative) will also be hit by the new spectrum pricing, as they may be asked to pay a one-time charge for excess spectrum holding. They will have to bear the new spectrum pricing once their licences come up for renewal from 2014/2015.

India's 3G (2100Mhz) pricing, which was decided in a keenly contested 2010 auction at USD3.6bn for a pan-India allocation, has proved to be expensive for Indian telcos - given the slower growth of data products due to expensive 3G handsets and lack of a 3G ecosystem. Furthermore, Fitch also notes that many Asia-Pacific countries have started to adopt auction-based allocation criteria.

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