Sector Update
Sector Update | 24 December 2013
Telecom
Expect warmer response to spectrum auction this winter
Telecom Consolidation
“Call Tracker”
In our August 2013 report titled
“Accommodative policy action –
next source of optimism”, we
had highlighted the possibility of
a significant reduction in
spectrum prices and concluded
that accommodative regulatory
regime could be the next source
of sector optimism apart from
ongoing industry consolidation
and resultant RPM/profitability
improvement.
While
the
regulator TRAI obliged with
recommendations of sharp cut
in spectrum reserve price as well
as spectrum usage charges
(SUC), the government tweaked
up the former and rejected the
later. In this note, we present
key takeaways form the pre-bid
conference organized by DoT for
the January 2014 spectrum
auction. While high SUC remains
an issue for incumbents,
operators appear more positive
towards likely participation in
the upcoming auction.
Presenting…
Takeaways from the DoT pre-bid conference
We attended the pre-bid conference organized by Department of Telecom (DoT)
for the upcoming spectrum auction in January 2014. Key issues raised by the
industry included 1) Ascending spectrum usage charges (SUC) regime (3-8% vs flat
3% for auctioned spectrum recommended by TRAI) being a disincentive for
incumbents to bid for additional spectrum, 2) Need to increase visibility on
contiguity/continuity of spectrum being bid-for, and 3) Ensuring a minimum 5MHz
spectrum block for operators planning to bid for the 900/1,800MHz spectrum
exclusively for 3G/4G rollouts. In contrast with the cold response to earlier two
spectrum auctions held in November 2012 and March 2013, we believe the
industry is warming up to the January 2014 spectrum auctions.
Lower reserve price to encourage participation though high SUC remains a
disincentive for incumbents:
While the industry seems to be satisfied with the
extent of spectrum reserve price reduction (post the 26%/53% decline for 1,800/900
MHz vs March 2013 auction), continuation of high SUC remains a deterrent.
Spectrum charges in proportion of allocated spectrum is a disincentive for
incumbents to bid as acquiring 900/1800 MHz spectrum increases their pay-outs on
the current revenue base and hence impacts margins. While TRAI had
recommended a flat rate at 3% of Adjusted Gross Revenue (AGR) for all auctioned
spectrum, the government has kept spectrum charges unchanged at 3-8% for GSM
operators based on spectrum allocated. GSM incumbents alerted the government of
yet another muted response to the auction if there is no change to the spectrum
usage charges as recommended by TRAI. The government is examining the issue.
Industry concerned about low visibility on contiguity/continuity of spectrum:
There were several participant queries on ‘contiguous’ spectrum allocation. Out of
the total 403 MHz spectrum to be auctioned in the 1,800MHz band, 230MHz is
contiguous 5MHz. ‘Continuity’ of spectrum would also be important and was
highlighted by operators whose spectrum is coming up for renewal.
GSM incumbents might bid to acquire 5MHz of contiguous 900/1,800 MHz
spectrum in their ‘3G-dark’ footprint:
We believe that Bharti/Idea/Vodafone might
consider acquiring 900/1,800MHz spectrum to roll-out 3G/4G networks in circles
where they do not own spectrum in the 2,100 MHz band. Some operators did raise
queries pertaining to need of ensuring that the auction process results in allocation
of 5MHz contagious spectrum in case an operator wins in the auction and does not
lead to a situation where a bidder ends up with either less than 5MHz spectrum or
non-contiguous spectrum (which cannot be used for rolling out new technologies).
5MHz threshold for renewal operators in both 900MHz and 1,800MHz: ‘Renewal
operators’ are currently allocated spectrum in 900MHz as well as 1,800MHz bands.
Auction treats renewal licensees as ‘new operators’ hence requiring them to bid for
minimum 5MHz in both bands if they want to re-bid for their current spectrum. This
would force them to either forego some spectrum or bid for extra spectrum based
on current holdings.
Report dated June 2013
Report dated August 2013
24 December 2013
Shobhit Khare
(Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Sector Update  
 
Comparative Valuation 
  
  
Bharti Airtel 
Idea 
RCom 
Bharti Infratel 
CMP 
(INR) 
328 
169 
131 
171 
Rating 
Buy 
Buy 
Neutral 
Neutral 
TP  Upside Mcap
(INR) 
465 
205 
110 
156 
42 
21 
‐16 
‐8 
21.2 
9.0 
4.4 
5.3 
EV 
29.6 
11.1 
10.6 
5.1 
35.6 
28.0 
22.9 
23.5 
P/E (x) 
20.3 
18.4 
10.9 
19.4 
16.0 
15.3 
7.3 
16.4 
EV/EBITDA (x) 
7.3 
7.9 
8.9 
7.1 
5.9 
6.3 
6.9 
6.4 
5.1 
5.7 
5.7 
5.7 
EV/Sales (x) 
2.4 
2.5 
3.1 
2.8 
2.1 
2.1 
2.6 
2.5 
1.8 
1.9 
2.2 
2.2 
(%)  (USDb) (USDb) FY14E  FY15E FY16E FY14E FY15E  FY16E  FY14E FY15E FY16E
  
RoIC (%) 
RoE (%) 
EBITDA Margin (%) 
Net Debt/EBITDA (x)  Net Debt/Equity (x)
  
FY14E 
FY15E 
FY16E  FY14E FY15E FY16E FY14E  FY15E FY16E FY14E FY15E  FY16E  FY14E FY15E FY16E
Bharti Airtel 
5.3 
7.7 
9.6 
6.1  9.5  11.0 
32.3  33.7  34.3 
2.0 
1.6 
1.2 
0.9  0.7  0.5 
Idea 
8.9 
12.6 
13.6  12.9  17.0  17.6 
31.6  32.7  33.5 
1.2 
0.6 
0.8 
0.6  0.3  0.4 
RCom 
5.6 
7.4 
8.9 
4.0  8.0  10.9 
34.7  37.5  38.1 
5.4 
3.9 
3.0 
1.4  1.1  0.8 
Bharti Infratel 
9.9 
11.0 
12.9  7.8  9.1  10.3 
40.0  39.6  39.2 
‐0.3 
‐0.5 
‐0.7 
NM  NM  NM 
  
Capex/Sales (%) 
Sales Growth (%) 
EBITDA Growth (%) 
EPS (INR) 
EPS Growth (%) 
  
FY14E 
FY15E 
FY16E  FY14E FY15E FY16E FY14E  FY15E FY16E FY14E FY15E  FY16E  FY14E FY15E FY16E
Bharti Airtel 
12.4 
13.3 
12.7  12.1  10.2  8.8 
19.8  14.8  10.8 
9.2 
16.1 
20.5  53.7 74.8  26.9 
Idea 
13.9 
12.0 
10.0  17.4  13.8  12.2 
38.9  17.7  14.9 
6.0 
9.2 
11.0  97.6 52.0  20.3 
RCom 
6.3 
6.6 
7.2 
5.1  8.3 
8.0 
15.9  17.1 
9.8 
5.7 
12.0 
18.0  506.4 110.1 49.7 
Bharti Infratel  14.5 
16.4 
16.2  5.9  8.6 
8.8 
13.7 
7.6 
7.7 
7.3 
8.8 
10.4  30.0 21.1  18.3 
* Proportionate EV/EBITDA and EV/sales                                                                                                                                                              Source: MOSL
 
Bharti: SOTP – FY15 Basis 
 
India business (excl. towers) 
Tower business (15% discount to fair value) 
Africa business 
Less FY15 net debt 
Less excess spectrum and renewal spectrum liability for FY16/17
Total Value 
Shares o/s (b) 
CMP 
Upside (%) 
 
FY15 
Ownership Proportionate  
EBITDA  
(%) 
EBITDA (INR b)
(INR B) 
209 
100 
209 
79 
84
90
75
EV/ 
EBITDA 
8.5 
6.0 
Fair value 
(INR b) 
1,774 
234 
451
499 
98 
1,629
 
Value/ 
Share 
444 
59 
113
125 
24 
465
3.99 
328 
42
Source: Company, MOSL
Idea SOTP ‐ FY15 Basis 
Core Business (ex‐Indus) 
Stake in Indus 
Less Net debt (FY15E) 
Less 75% of potential spectrum related payments within 4 yrs 
Total Value 
Shares o/s (m) 
 
CMP (INR) 
 
Upside (%) 
* 80% stake in ABTL which owns 16% stake in Indus towers 
Methodology 
FY15 EV/EBITDA 
FY15 EV/Tower 
Driver 
88 
118,000
Multiple 
9.5 
3.3
Fair Value (INR b) 
833 
40* 
61 
129 
682 
3,303 
Value/sh (INR) 
251 
12
19 
39 
205
169 
21
 
 
Source: Company, MOSL
 
 
Auction timetable 
Source: Company, MOSL
 
24 December 2013
 
 
  2
 
 

Sector Update
Lower reserve price to encourage participation though high SUC
remains a disincentive for incumbents
While the industry seems to be satisfied with the extent of spectrum reserve price
reduction (post the 26%/53% decline for 1,800/900 MHz vs March 2013 auction),
continuation of high SUC remains a deterrent. Spectrum charges in proportion of
allocated spectrum is a disincentive for incumbents to bid as acquiring 900/1800
MHz spectrum increases their pay-outs on the current revenue base and hence
impacts margins. While TRAI had recommended a flat rate at 3% of Adjusted Gross
Revenue (AGR) for all auctioned spectrum, the government has kept spectrum
charges unchanged at 3-8% for GSM operators based on spectrum allocated. GSM
incumbents alerted the government of yet another muted response to the auction
if there is no change to the spectrum usage charges as recommended by TRAI. The
government is examining the issue.
Circle wise details of spectrum put up for auction
1800 MHz 1800 MHz
Amount of
March January 2014
1800MHz
%
2013
auction
change spectrum
auction
reserve
vs earlier to be
price/5MHz price/5MHz
auctioned
(INR b)
(INR b)
Delhi
19.4
11.0
-44%
22.8
Mumbai
19.0
10.4
-46%
25.2
Kolkata
4.5
3.7
-20%
26.8
Andhra Pradesh
11.5
8.2
-29%
22.6
Gujarat
9.0
7.2
-20%
12.0
Karnataka
9.2
7.8
-16%
24.6
Maharashtra
10.5
8.7
-18%
14.0
Tamil Nadu
12.2
10.4
-15%
30.2
Haryana
1.9
1.4
-27%
16.4
Kerala
2.6
2.6
0%
28.0
Madhya Pradesh
2.2
2.2
0%
19.2
Punjab
2.7
2.7
0%
18.4
Rajasthan
1.9
1.3
-31%
20.8
U. P. (East)
3.0
3.1
0%
9.8
U.P. (West)
4.3
3.1
-28%
2.4
West Bengal
1.0
1.1
2%
13.0
Assam
0.3
0.4
1%
11.4
Bihar
1.7
1.9
9%
4.2
Himachal Pradesh
0.3
0.3
-4%
20.4
Jammu & Kashmir
0.3
0.3
-1%
6.2
North East
0.4
0.4
-1%
26.8
Orissa
0.8
0.8
-1%
28.0
Pan India
119
88
-26%
403
900MHz
1800
900MHz
Amount of
January 2014
MHz March 2013
900MHz
%
auction
total
auction
change spectrum to
reserve
value price/5MHz
vs earlier
be
price/5MHz
(INR b) (INR b)
auctioned
(INR b)
49.9
38.8
18.0
-54%
16.0
52.2
38.0
16.4
-57%
16.0
19.6
9.1
6.3
-31%
14.0
36.8
17.2
38.1
24.2
62.8
4.4
14.6
8.3
9.9
5.4
6.0
1.5
2.7
0.8
1.6
1.2
0.3
1.9
4.5
364
86
41
-53%
46
900
Total
MHz
spectrum
total
value
value
(INR b)
(INR b)
57.6
52.5
17.5
107.5
104.6
37.1
36.8
17.2
38.1
24.2
62.8
4.4
14.6
8.3
9.9
5.4
6.0
1.5
2.7
0.8
1.6
1.2
0.3
1.9
4.5
128
491
Source: DoT
24 December 2013
3

Sector Update
Spectrum usage charge slabs for GSM operators
Spectrum slab
Upto 4.4 MHz
Upto 6.2 MHz
Upto 8.2 MHz
Upto 10.2 MHz
Upto 12.2 MHz
Upto 15.2 MHz
% of Adjusted Gross Revenue (AGR)
3%
4%
5%
6%
7%
8%
Source: DoT
2QFY14: Spectrum charges as % of AGR
6.3
5.6
5.6
5.4
5.2
4.5
3.7
3.6
2.9
3.2
Source: TRAI
2QFY14: Operator wise spectrum usage charges paid (INR b)
Bharti
Vodafone
Idea
BSNL/MTNL
Tata Tele
Rcom
Aircel
Uninor
Sistema Shyam
0.1
0.1
0.8
0.8
0.7
1.4
2.6
3.4
4.9
Source: TRAI
24 December 2013
4

Sector Update
Industry concerned about low visibility on contiguity/continuity
of spectrum
There were several participant queries on ‘contiguous’ spectrum allocation. Out of
the total 403 MHz spectrum to be auctioned in the 1,800MHz band, 230MHz is
contiguous 5MHz. ‘Continuity’ of spectrum would also be important and was
highlighted by operators whose spectrum is coming up for renewal.
Details of 5MHz contiguous blocks in 1800 band
5MHz contiguous (MHz) Other (MHz) Total (MHz) % of 5 MHz contiguous spectrum
Delhi
Mumbai
Kolkata
Andhra Pradesh
Gujarat
Karnataka
Maharashtra
Tamil Nadu
Haryana
Kerala
Madhya Pradesh
Punjab
Rajasthan
U. P. (East)
U.P. (West)
West Bengal
Assam
Bihar
Himachal Pradesh
Jammu & Kashmir
North East
Orissa
Pan India
15
15
20
15
5
20
5
20
5
25
10
10
10
0
0
5
5
0
5
0
15
25
230
8
10
7
8
7
5
9
10
11
3
9
8
11
10
2
8
6
4
15
6
12
3
173
23
25
27
23
12
25
14
30
16
28
19
18
21
10
2
13
11
4
20
6
27
28
403
66
60
75
66
42
81
36
66
30
89
52
54
48
0
0
38
44
0
25
0
56
89
57
Source: DoT
24 December 2013
5

Sector Update
GSM incumbents might bid to acquire 5MHz of contagious
900/1,800 MHz spectrum in their ‘3G-dark’ footprint
We believe that Bharti/Idea/Vodafone might consider acquiring 900/1,800MHz
spectrum to roll-out 3G/4G networks in circles where they do not own spectrum in
the 2,100 MHz band. Some operators did raise queries pertaining to need of
ensuring that the auction process results in allocation of 5MHz contagious
spectrum in case an operator wins in the auction and does not lead to a situation
where a bidder ends up with either less than 5MHz spectrum or non-contiguous
spectrum (which cannot be used for rolling out new technologies).
3G spectrum footprint, revenue coverage and investment required
Source: MOSL
24 December 2013
6

Sector Update
5MHz threshold for renewal operators in both 900MHz and
1,800MHz
‘Renewal operators’ are currently allocated spectrum in 900MHz as well as
1,800MHz bands. Auction treats renewal licensees as ‘new operators’ hence
requiring them to bid for minimum 5MHz in both bands if they want to re-bid for
their current spectrum. This would force them to either forego some spectrum or
bid for extra spectrum based on current holdings.
Renewal spectrum put up for auction (MHz)
Bharti Airtel
900 MHz
Delhi
Mumbai
Kolkata
6.2
1.8
8
1800 MHz
2.0
8
8
7.8
Vodafone
900 MHz
1800 MHz
2
2
2
Source: TRAI, DoT
8
2
Loop Telecom
900 MHz
1800 MHz
24 December 2013
7

Sector Update
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8