Reliance Jio: What Analysts Say

TeleAnalysis brings views of Credit Suisse, Deutsche Bank, Goldman Sachs and UBS on Reliance Jio’s acquiring 1800 MHz spectrum in 14 key markets.

Reliance-Jio-rcom-dealCredit Suisse

In our view, the quantum of 1800 spectrum that RIL has bought could fall short of its needs if it were to offer high-speed LTE services, while it could be quite sufficient for 2G services. We continue to believe Reliance Jio could come to market with an LTE+voice offering with CSFB (circuit switched fall back). With this, RIL-Jio’s total investment into the telecoms business has crossed $6 bn (before network rollout).

Bharti and Vodafone managed to largely renew their spectrum in Kolkata (and Mumbai for Vodafone). But Delhi saw a surprising threeway tussle among Bharti, Vodafone and Idea—with Idea winning 5 MHz. In addition to renewals, the incumbents have purchased add-on 1800 MHz spectrum in many circles. And these add-on spectrum is likely to be used for FDD-LTE in future (as a possible defence against potential TD-LTE launch by Reliance Jio).

Deutsche Bank
The competitive outcome of the 900 MHz auction in all three Metros led to high payouts from Vodafone and Bharti. In addition, if the incumbents try to replicate their 900 MHz holding in the non-metro circles (auction in 6-12 months), the total potential payout is estimated at Bharti (Rs 264 bn), Idea (Rs 297 bn) and Vodafone (Rs 314 bn).

Reliance Jio is likely to increase competitive intensity in the medium term as the company has spent Rs 110 bn to acquire 1800 MHz in 14 key markets. In the short-run, it could utilise the spectrum to roll out voice services as a complement to its expected TD-LTE data offering in the 2.3 GHz band. However, we note a robust ecosystem for FD-LTE currently exists in the 1800 MHz band, and in the medium term, we expect devices to support both variants seamlessly. This should aid Reliance Jio’s competitive position in the long-run.

Idea maintains restraint in its bidding, but remains vulnerable for the next round of auctions. We believe Idea’s bids reflect the cashflow constraints it faces relative to its peers and the need to conserve cash for the next round of auctions for 900 MHz spectrum in its legacy markets. Its key moves in this have been to buy 5 Mhz in the 900 MHz band in Delhi and 9 MHz in the 1800 MHz band in Maharashtra.

Goldman Sachs
These auctions also lead us to conclude that competitors may bid up 900 MHz prices of other telcos in the future when they come for renewal.

Reliance Jio enters selectively in the contiguous 14 circles, implying its inclination to use 1800 MHz for 4G over traditional voice offering. Even Vodafone/Bharti/Idea/Uninor/Aircel acquired spectrum in the 11/15/11/5/5 circles – with likely focus being to offer 2G initially and 4G later (in contiguous circles). More 1800 MHz spectrum sold to be negative for tenancy growth of Bharti Infratel in the near term but expect it to benefit from 4G rollouts in the medium term.

With auctions ending, we expect regulatory overhang on Bharti stock to decline as it secured back its 900 MHz spectrum and for the focus to shift to Idea as its 900 MHz is coming up for renewal in 7 circles in 2015.

The telcos are focusing on data. Bharti/Vodafone/Idea acquired 1800 MHz in 15/11/11 circles, which account for 72%/65%/74% of their total revenues. We believe the strategy could be to: Improve capacity, reduce capex with more spectrum; Use the spectrum for 4G rollout in future; and reduce risks of further new competitor entry and material overbidding risks when their 900 MHz spectrum comes up for renewal. On the negative front, the renewal prices have increased for telcos as the winning price in this auction could be considered as reserve price for renewal.

Based on these auctions, we believe that in the future, spectrum prices during renewal particularly for 900 MHz would be much higher than reserve prices if competitors push up the prices. Such a scenario may lead to smaller telcos either not participating in the auctions or not getting back their spectrum. This could then result in the exit of smaller telcos and market consolidation that is in favor of larger telcos that have stronger balance sheets.

We believe that acquisition of 1800 MHz spectrum by Reliance Jio is a good way to future proof the business as it is the favored LTE band globally. All major operators have strengthened their 1800 MHz spectrum holding in their dominant service areas keeping the strategy of LTE on 1800 MHz in mind.

The Indian mobile voice pricing will continue to inch up for the foreseeable future and Bharti Airtel and Idea will emerge as key beneficiaries and data growth will further boost operating leverage.

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