Regulator suggests sharp cut in spectrum prices - but more to go (+ve Bharti/Idea) : Credit Suisse

● TRAI released its recommendations on spectrum pricing on 9
Sep. Directionally, the recommendations are in line with
expectation, seeking a 37% cut in average reserve prices vs
recent auctions.
● However, we believe that the suggestions are not foolproof (i.e.,
risks of auction failure still exists). While top circles like
Mumbai/Delhi have seen sharp (50%+) spectrum price cuts, in
half the country the reserve price has been untouched (in spite of
the previous auction clearly failing in 10 of these markets). We
believe this is not the end of spectrum price cuts in India.
● Crucially for incumbents, Bharti/Idea, the near-term renewals are
addressed with sharp cuts in top circles and a reduction in
900MHz premium to 1.6x over 1800MHz (from 2x). The NPV hit
for Bharti/Idea come down by up to 45% (with next three-year
payouts a comfortable 4-16% of FCF).
● Next steps: TRAI's suggestions will be taken up by DoT (govt)
while framing rules for the next auction. Given the tight court
directives, it is unlikely DoT will do anything that could risk auction
failure (i.e., no increase in price likely). Retain OP on Bharti/Idea.

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0% cut in spectrum NPV hit for stocks✆ more to go
Directionally, TRAI's recommendation were in line with expectations of
a cut in spectrum auction reserve price – though we view these as still
incomplete and open to risk of another failed auction. While the stated
vision for the recommendation is the need to ensure successful
auctions in all circles as per the Supreme Court's directive, the real
driving force appears to be the renewals in top circles coming up in
the near term.
TRAI has suggested an average 37% cut in the 1800MHz reserve price
from the past auctions across circles – though there are significant
differences in the circle level specifics. Top circles like Mumbai/Delhi
see a 50%+ cut, while in 11 out of 22 circles, the new reserve price is no
different from the last auction price. Given that in the Nov-12 auction all
circles (except one) saw significant chunks of unsold spectrum, it is
doubtful if more spectrum will now get sold at the same price in these 11
regions. For the three circles coming up for renewal in 2014, the
900MHz multiple has been reduced to 1.6x (vs 2x earlier).
With these new reserve prices, the NPV of spectrum payouts for
Bharti/Idea come down by 41-45%, while the actual payout for the
next three years comes down by 40-50%. For the two companies, the
next three-year payouts are now a comfortable 4%/16% of FCF,
respectively (on deferred payment mode). Taking another yardstick,
these prices are 50% higher than the price Vodafone had offered for
its renewal some time back – we have to see if the operators are
attracted at these prices.
Refarming is now reduced to a repricing
TRAI is sticking to its earlier stand that all the 900MHz spectrum with
incumbents should be put up for sale. It is recommending that the
provision inserted by DoT reserving some of this spectrum for incumbents
be done away with. In our view, the concept of 900MHz refarming is now
redundant and is being replaced by repricing at market value. The
implication for stock investors is the straightforward spectrum payout
number – which is becoming smaller and hence positive. TRAI is also
recommending a minimum bidding of 5MHz on 900MHz spectrum – which
could prevent opportunistic/disruptive bidding by smaller operators.
Curiously, TRAI is strongly supporting the idea of 'refarming' of
800MHz CDMA spectrum. So strongly, in fact, that it is even
recommending that no 800MHz auctions take place now (going
against the supreme court directive that all cancelled spectrum need
to be sold). In our view, 800MHz 'refarming' could be a minor negative
for CDMA operators (RCOM/ TTSL) but positive for GSM operators.
Stiff rollout obligation ✆ advantage incumbents
Taking rollout obligations to the next level, TRAI recommends that all
villages with 5000+/2000+ population need to be covered by Mar-
2016/Mar2018, respectively (3 additional years for new operators like
Telenor). We believe this rule could impact the smaller operators
adversely – many of whom have based their business models on
urban-centric operations. This could also enhance the perceived value
of 900MHz spectrum. However, these are 'add-on' recommendations
and we expect strong lobbying by the industry against this and hence
lower likelihood of being accepted by government.
Other important points
● TRAI reiterates its earlier recommendations that annual spectrum
usage charge (SUC) should be brought down to a uniform 3% of
revenues for all operators (from the current slab-based regime of
3-8%). This should be positive for Bharti/Idea if implemented.
However, we recall that the government did not accept this
recommendation last time.
● Giving various arguments, the regulator denies allegations of
cartelisation in the previous failed auctions.
● In an indirect reference, TRAI also addresses voices demanding a
level playing field for last year's auction participants in case
pricing/SUC are reduced now. TRAI argues that policy decisions
are the exclusive preserve of the government and 'no policy is
intended or implemented in permanence'.
● TRAI recommends India spectrum trading to be allowed, and has
requested DoT to hold back on future spectrum auctions till a clear
policy on trading is articulated. Given that the government has
recently shown interest in allowing spectrum trading, this is a space
to watch out for. This should be positive for the industry, in our view.