India Telecoms Auction concludes; Reliance Jio does not win 900 MHz spectrum::JPMorgan

India Telecoms Auction concludes; Reliance Jio does not win 900 MHz spectrum but wins 5-7 MHz spectrum in 1800 MHz band in 14 circles

Spectrum auction concludes after 10 days. The key takeaways from the auction include: (a) Reliance Jio has won sizable spectrum in 14 of the 22 circles; these 14 circles account for more than 72% of total industry revenues; (b) aggressive bidding for 900 MHz spectrum in Delhi, Mumbai and Kolkata and for 1800 MHz in select circles, (c) only three large incumbents and Reliance Jio won meaningful spectrum. We believe the successful spectrum auction will bring much-needed regulatory certainty about spectrum price and ownership, but the competitive environment might deteriorate with the entry of one new player i.e., Reliance Jio. We remain cautious regarding Jio’s market share gain strategy given incremental net subscriber additions are likely to remain muted. If Jio resorts to pricing competition in the voice market, it could be disruptive to the whole industry.

· Large three incumbents (Bharti, Vodafone, Idea) and Reliance Jio won about 95% of total spectrum sold. These four players account for 98% of the total value of spectrum sold, suggesting that there was very muted participation from other players such as Telewings, RCom and Aircel. In 900 MHz band, which accounts for about 39% of total/final spectrum value (in Feb-14 auction), there was significantly aggressive bidding. Final spectrum price for Delhi is at about 106% premium to reserve price, while Mumbai spectrum price is 72% above reserve price. In Kolkata, Vodafone and Bharti retained their 900 MHz spectrum. In Mumbai, Bharti has lost 3 MHz spectrum to Vodafone, while in Delhi, Idea won 5 MHz spectrum (in 900 MHz band) from Bharti and Vodafone. Thus, Bharti was not able to hold onto its existing 900 MHz spectrum in full measure in two of the three circles. (See Tables 1-2 for spectrum won and spectrum value for various operators).

For 1800 MHz spectrum, operators will pay a meaningful premium on reserve price for Assam, Delhi, Gujarat, UP (West), Madhya Pradesh, Mumbai and J&K circles (more than 20%). Bharti, Idea and Vodafone might use their new spectrum for 4G roll-out as well. Notably, Idea and Vodafone do not have 4G spectrum currently, while Bharti has 4G spectrum in 8 circles only (including Qualcomm).

· Reliance Jio has won spectrum in a broad-based manner covering 14 circles in 1800 MHz, which account for 72% of total industry revenues (as per Sep-13 quarter data). Interestingly, of the remaining 8 circles (where Jio has not won) four circles had less than 10 MHz spectrum for sale. These four circles account for 17% of industry revenues. Hence, Reliance Jio will have a play in 85-90% industry revenue base, where the company had a chance of winning meaningful spectrum (greater than 5 MHz). It is only in two significant circles (Punjab and Rajasthan) having meaningful supply of 1800 MHz spectrum, where Reliance Jio did not win. Notably, Reliance Jio has won more than 5 MHz (and less than 7 MHz) spectrum in each of the 14 circles where they have won. However, Reliance Jio has not won 900 MHz spectrum in any of the three circles. Reliance Jio’s presence in these markets will increase competitive intensity if Reliance Jio has voice ambitions. We note that net subscriber additions have already moderated and a new player might change net subscriber addition dynamics for incumbents.
· Impact on incumbents – entry of Reliance Jio might increase competitive intensity in voice market. Though the conclusion of the spectrum auction will likely bring regulatory certainty for the sector, entry of Reliance Jio might increase competitive intensity in the sector. The company has won more than 5 MHz spectrum in 14 circles – sufficient to start voice operations. However, the company might use this spectrum to consolidate its 4G footprint, but this seems a distant possibility as the company already has 20 MHz 4G spectrum in 2300 MHz band in all 22 circles. Also, Reliance Jio’s entry in 1800 MHz spectrum has implications for future auctions because the company might bid aggressively to improve/expand its footprint in future auctions. Hence, though the auction has improved regulatory certainty, it has increased competitive uncertainty we think.

Table 1: Three large incumbents (Bharti, Vodafone, Idea) and Reliance Jio account for 98% of total spectrum value in Feb-14 spectrum auction; Bharti and Vodafone have to pay about USD 3 billion each for the spectrum purchased

	Value of spectrum bought (in INR mn)	Proportion of total spectrum value	Value of spectrum bought (in USD mn)
Bharti Airtel	185,296	30.3%	2,968
Vodafone	196,447	32.1%	3,146
Idea	107,156	17.5%	1,716
Reliance Jio	110,544	18.1%	1,770
Telewings	8,447	1.4%	135
RCom	1,632	0.3%	26
Aircel	2,099	0.3%	34
Total	611,622	100.0%	9,795

Source: Department of Telecommunications, J.P. Morgan, Bloomberg; Note: Exchange rate of INR 62.44 is as of at the end of Feb 13, 2014

Table 2: Reliance Jio won 1800 MHz spectrum in 14 of the 22 circles, while Bharti lost some 900 MHz spectrum in Delhi and Mumbai circles; final price is at meaningful premium for 900 MHz spectrum in all three circles and for 1800 MHz spectrum in select circles

		Spectrum won							Initial spectrum reserve price	Winning price	Premium to reserve price
		Bharti Airtel	Vodafone	Idea	Reliance Jio	Telewings	RCom	Aircel	in mn per MHz	in MHz
1800 MHz spectrum
	Andhra Pradesh	8.8	0.6	6.0	5.8	1.4			1,630	1,630
	Assam				5.4	6.0			70	361	415.7%
	Bihar					2.2			370	431	16.5%
	Delhi	7.0	8.0	0.6	5.4				2,190	3,640	66.2%
	Gujarat		4.4	1.6	6.0				1,430	2,378	66.3%
	Haryana		2.4	6.0					270	270
	Himachal	10.2							60	60
	J&K	2.6						1.8	50	61	22.0%
	Karnataka	8.8	5.0	5.0	5.0				1,550	1,550
	Kerala	5.0	7.0	10.0	5.0				520	520
	Kolkata	5.0	8.0		5.0				730	730
	Madhya Pradesh	5.8		7.0	6.4				430	504	17.2%
	Maharashtra			9.0	5.0				1,730	2,904	67.8%
	Mumbai	6.0	8.2	2.0	6.6		0.6		2,070	2,720	31.4%

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