By Manish Sharma

The auction for India's third generation (3G) telecom licences that finally kicked off on 9 April will fetch the government more revenues than what it expected. But the going will be tough for most telecom companies in the country. While intense price war is expected to continue at the wafer-thin levels, the heavy bidding indicates that balance sheets of the winners are set to be stretched in the near term.

Nine telecoms firms are in the fray for three pan-India 3G licences that cover 22 regions. The online auction attracted only existing 2G players with not a single new entrant. The government has already given 3G licence to state-run BSNL and MTNL on the condition that they pay the same fee as would be levied on private players after the auction.

The auction is expected to close in a day or two, with the government likely to earn Rs 500 billion revenues from it. The bidding for Broadband Wireless Access (BWA) spectrum will start after a gap of two days, and is likely to generate Rs 100-150 billion. For two blocks of BWA spectrum, there are 11 bidders with four new players. The government is expected to earn estimated Rs 600-650 billion from both 3G and BWA, far above the budgeted target of Rs 350 billion.

The battle for spectrum has become quite intense in India where the larger private operators have been restricted in their ability to deliver voice and data services. But, there is much more riding on this auction for the 12-odd telecom operators. The entire sector is already under pressure after the price war and analysts see no change for the rest of 2010. They expect each winner to spend up to US$ 3 billion for acquiring the 3G and wireless broadband spectrum, and building next-generation networks would cost billions of dollars more. The price of spectrum for Mumbai and Delhi circles went past Rs 16.50 billion -- the price at which the telecom ministry awarded 2G spectrum for all of India in 2008. A brokerage firm had noted that market leader Bharti’s balance sheet will be the most stretched in the sector (FY11E net debt/equity of 1.4x and net debt/ EBITDA of 2.8x) post the auctions, assuming the US$9 billion Zain Africa acquisition goes through post regulatory approvals.

India is the second-largest wireless market with 600 million of subscribers. It has signed up 16 million connections a month on average in the past one year. The numbers look promising, but call charges have fallen to as low as 1/100th of a US cent amid intense competition among companies to add users faster than rivals. A majority of the new users come from rural areas, which spend less than their urban counterparts, and people use more than one connection to benefit from freebies offered by newer mobile firms. So, where will 3G fit in? Analysts believe that demand will be dictated by affordability and value. As of now, 3G enabled phones cost more than Rs 20,000. To bring the advantage of 3G, phones prices need to come down much further. With the fast growing internet usage on mobile phones, even in rural areas, reaching out to the bottom of the pyramid would hold key. In all, internet access without giving up on voice would be the value proposition of 3G mobile phone services in India.

Indiabiznews, May 08, 2010