Feb auctions for spectrum unlikely to flop, but donít expect a fierce fight

Jan 28 2014, 01:11 IST
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Spectrum in Mumbai and Delhi is expensive so analysts do not expect new operators to bid for it. Spectrum in Mumbai and Delhi is expensive so analysts do not expect new operators to bid for it.
Summary3G auction in April 2010 led to aggressive bidding with spectrum being sold at almost 4x the reserve price

Though the forthcoming spectrum auctions for 1,800- and 900-MHz bands starting from February 3 are expected to be successful, unlike the previous two (November 2012 and March 2013) that flopped, it is certaintly not going to be like the 2010 3G auctions that saw very aggressive bidding by operators.

As the quantum of spectrum being put up for bids this time is more than the earlier auctions and the reserve price is also lower, there isn't a supply-demand mismatch, which existed during the time of 3G auctions, and artificial scarcity that was created in November 2012 and March 2013, along with high reserve price.

For instance, the reserve price of the forthcoming auction is around 51% lower than the November 2012 one and 47% lower compared to the 3G auction discovered price.

The quantum of spectrum in 1,800-MHz paired band to be auctioned is 403.2 MHz, i.e., almost 18 MHz per circle against 355 MHz in the 3G auction and 295 MHz in the November 2012 auction.

Moreover, with additional 3G and 4G spectrum (used to provide high-speed data service) expected to be released in the future, the fear of spectrum being scarce no longer exists, according to Morgan Stanley analysts Vinay Jaising, Amruta Pabalkar and Vanessa DíSouza. This scenario did not exist in 2010 when the government earned over Rs 1 lakh crore from sale of 3G and 4G radiowaves.

Analyst estimate that the February auction is likely to fetch the government exchequer around Rs 57,500 crore, when the entire spectrum put for sale is lapped up, as operators have understood that investors tend to penalise irrational bidding.

The 3G auction in April 2010 led to aggressive bidding with spectrum being sold at almost 4x the reserve price. ďIn the six months prior to the auction, telco stocks underperformed MSCI India by 30%; and net debt expanded for companies with operators investing 15-25% of their capital, depressing the return on capital employed (ROCE). Foreign institutional ownership reduced in the auction,Ē said the Morgan Stanley report.

However, during the 2G auction in November 2012, which did not find any takers for four circles, FII ownership that had reduced pre-auction finally started increasing after auction due to operators becoming a lot more rational.

Another factor that will dissuade aggressive bidding is that the price discovered in this sale process will be used as the base price when mobile permits of

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