The telecom sector continued to make progress in augmenting its network capacity with additional fiber and wireless deployments to meet the constant demand for higher-speed networks in 2021.
The spectrum auction concluded with the government pocketing 1,50,173 crore (equated to annual receipts of 13429 crore for 20 years). As expected, the focus of the top 2 telcos was on the core spectrum for 5G, 3,300 MHz (mid-band) and 26 GHz (millimetre wave band), which attracted maximum bids.
The potential for more competitive broadband markets. Faster mobile and fixed wireless connections create more viable alternatives to wired connections and new opportunities for bundled service offerings and business models for service providers. With ever-expanding options for high-quality communication and internet services from telecom, cable, wireless, and satellite internet providers, consumers will enjoy enhanced flexibility in purchasing and consuming services in the new year. However, these trends may also lead to a more competitive environment in 2022.
Opportunities on peak
• A shift to more decentralised government broadband infrastructure funding. The $1 trillion Infrastructure Investment and Jobs Act (IIJA) passed in November earmarks $65 billion for continued broadband adoption and deployment. While government programs dedicated to expanding and improving telecommunication infrastructure and services have traditionally been managed at the federal level, it appears the bulk of the bill’s federally allocated broadband dollars will flow through more decentralised state-based models.
• Rising interest in multi-access edge computing and private cellular networks. The enterprise market for private cellular networks and edge computing is gaining momentum. The market is still nascent but promises to be competitive, with many different players vying for their share. Network operators will have to compete against other players, who may prove key partners in delivering their solutions. Ecosystem players will likely begin to stake out and define their role in this emerging but rapidly evolving market in the coming year.
• The need to reassess cybersecurity and risk management in the 5G era. While the widespread adoption of 5G offers many benefits, it also creates new security concerns and challenges. As operators have taken steps to evaluate and minimise threats arising from 5G and software-centric networks in their own organisations, they are in a unique position to offer 5G security services to enterprises seeking to deploy their own advanced wireless networks.
The key differential was a pan-India bid for a 700 MHz spectrum band by Jio to fortify its indoor coverage strength and possibly expand fixed wireless access (FWA) for home broadband services later, albeit at an incremental outlay of 39,270 crore. Given the huge quantum of spectrum purchased, the overall weighted spectrum usage charges (SUC) are likely to go down (as zero SUC was notified for new spectrum auctioned along with the removal of 3% floor rate) for Jio, Airtel by 2200 crore, 2000 crore, respectively, on an annual basis.
Major 3 operators’ performance
Bharti’s AGR (incl. NLD) was up 2.6% QoQ / 27.5% YoY to Rs189bn. Bharti’s AGR (incl. NLD) market share dipped to 35.5%, down 50bps QoQ / 220bps YoY. Its incremental AGR QoQ was Rs5bn vs Rs9bn for RJio. This was due to higher long validity customers on RJio, which reflects the benefit of the tariff hike in Q1FY23. This indicates a change (cut) in NLD carriage fees which has led to an increasing (re-base) in circle-wise AGR for Bharti during Q1FY23. The circles that have shown high growth are: Delhi (+9.9% QoQ), UP east (+17%), WB (+8.1%), HP (+12%), and Bihar (+15.9%). Bharti was already outperforming in C’ circles post expansion in the 4G network.
VIL’s AGR (incl. NLD) market share fell to 17.7% (down 50bps QoQ). VIL’s AGR (incl. NLD) rose 1% QoQ and 11.2% YoY to Rs95bn. Within leadership circles, Gujarat, AP, TN and Kerala underperformed while UP east, MP and Mumbai have done well. VIL has performed well in its established circles with AGR growth of 2.9% QoQ. Non-focus circles continued to struggle with just a 0.8% QoQ rise in AGR.
RJio’s AGR (incl. NLD) rose 4.1% QoQ / 20.7% YoY to Rs218bn. RJio’s AGR (incl. NLD) market share was 40.9%, up 6bps QoQ. AGR growth has been relatively higher in metros at 4.5% QoQ and A’ circle at 4.6% QoQ as these circles have higher subs with long recharge validity and the benefit of tariff hike would have kicked-in in Q1FY23. B / C’ circles AGR rose at 3.9% / 3.5%, respectively. In circle-wise analysis, RJio has optically lost market share due to higher AGR allocation for Bharti (one-time rebase).
However, RJio has under-performed in a few circles – Mumbai (down 1% QoQ) and Kolkata (down 0.6% QoQ) – while Delhi has done well with a growth of 9.5% QoQ. Among non-metro circles, only HP under-performed with a growth of just 0.5% QoQ.
Source – TRAI & I-sec Research
Key highlights of auction
• Jio, Airtel, Vodafone Idea, Adani outlay was at 88,078 crore, 43,084 crore, 18,799 crore, 212 crore, respectively. Assuming, operators opt for 20-year payout, annual equated instalment will be 7,877 crore, 3,853, crore, 1,681 crore for Jio, Airtel, VIL, respectively
• Both Jio and Airtel also selectively bolstered their mid-band spectrum by adding on to 1800 and 1800/2100 bands, respectively
• Adani Data Networks made a modest outlay of 212 crore for 400 MHz of spectrum across six cities in the 26 GHz band for its captive networks needs.
• VIL acquired 50 MHz each of mid band (3300 MHz band) in 17 priority circles and 200-800 MHz of 26 GHz band in 16 circles
• The government will allocate the spectrum over the next fortnight and 5G services are expected to start rolling out by October in the beginning with major metro cities.
There’s an expectation of 15% tariff hike by telcos in the near term to compensate for near term cash outflows as most incremental 5G benefits of industry use cases are still at least two to three years away
Post spectrum auction, the relative positioning of top two telcos (Jio/Airtel) to get strengthened further with churn odds for VIL increasing as the services coverage/capacity of Jio/Airtel would be better. Airtel is more comfortable in terms of net cash outlay with net benefit of SUC benefit to cover more than 50% of incremental annual payout for spectrum (28% of incremental annual payout will be covered by SUC benefits for Jio).
Furthermore, Jio’s positioning in the overall FWA could propel its home broadband growth momentum in the medium to long term. Thus, it's better to remain constructive on Jio and Airtel as focus shifts to quantum and timing on tariff hike.
Note: This article is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment relatedinvestment-related decision.
Shuchi Nahar is a Certified Research Analyst. She can be found on Twitter at @shuchi_nahar