How relaxing spectrum holding cap by telcos' can be a game changer

In a move seen to benefit operators who are also dealing with mergers in the sector the Telecom Regulatory Authority of India (TRAI)’s proposal has been accepted. The administrative and financial body, Telecom Commission, on Tuesday cleared TRAI’s proposal to relax spectrum holding caps by the companies.

The crux of the proposal entailed two main points.

1. The overall spectrum cap be revised from the current limit of 25% to 35%.

2. The current intra-band cap be replaced by a cap of 50% on the combined spectrum holding in the sub-1 GHz bands.

These sub-1 bands included 700MHz, 800MHz and 900 MHz.

“The industry is undergoing structural changes with consolidation being at the forefront. Relaxing of the spectrum caps will ease the consolidation transactions which are in advanced stages and the merging telcos would not have to surrender any spectrum where earlier they could have breached the cap limits,” said Harsh Jagnani, Sector Head and Vice President, Corporate Ratings, ICRA.    

How will this ease consolidation?

During the last few quarters of FY18, the Indian telecom industry witnessed a phase of turbulence. The debt laden sector underwent intense competition post the launch of Reliance Jio.

This led to pricing pressures and decline in revenues and profitability.

“The FY2018 industry revenue is estimated to decline by 13% and EBITDA to decline by 34%,” ICRA analysts said on Thursday.

The process of consolidation with another telecom entity is expected to be eased with the implementation of the proposal. Further operators were expected to bear spectrum shedding cost which will not be the case.

It will ease the ‘exit route’ for operators under stress in the Indian telecom market.

“As the industry structure sees a change with the number of operators reducing, this move by TRAI will ease the process of consolidation and will also provide more flexibility to the functioning of operators and will help asset monetisation by the exiting operators,” a report by Care Ratings said.

Debt of the sector as per ICRA’s estimates is also expected to improve along with revenue increase by 10% and EBITDA to increase by 42%. Although ICRA said this was still be lower than FY2017 levels.

“The industry debt levels, estimated at Rs. 4.7 lakh crore as on March 2018 are expected to reduce to Rs. 4.2 lakh crore as on March 2019, with monetisation of tower assets and promoter support being main drivers. Nevertheless, the debt protection metrics will continue to remain weak - estimated debt/EBITDA of 7.2x as of March 31, 2019,” ICRA said.

Who does this benefit?

Subscribers were estimated to benefit the most from continuous data services, Vodafone was cited in a report.

“In addition, the additional spectrum that now remains with the telcos will allow for better service quality. Moreover, with growing data consumption, spectrum requirements would remain high and thus relaxing the spectrum cap is beneficial for the industry. Also the extension of time period for the payment of spectrum bought in auctions to 16 years from the current 10 years was earlier approved by the Commission which would ease the cash outflow towards auction payments,” ICRA’s Jagnani added.

Another major beneficiary of the move is expected to be Jio. Jio is expected to sweep up more airwaves in the 850MHz band.

For Airtel the move to remove the intra-band cap was designed to allow more operators to hold more than 10MHz in the 4G band of 850 MHz.

“The acceptance of a cap of 50% on the combined spectrum holding in the sub-1 GHz bands will prevent large holding of spectrum by a particular operator and thus will provide competitive advantage to the operators,” Care Ratings analysts said.