Overspending on 5G auctions is a key risk for telecom stocks

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The Cabinet cleared India’s much-anticipated 5G spectrum auction, approving the auction of 72 GHz of 5G spectrum across various frequency bands. The spectrum reserve price is unchanged from the recommendations of the telecommunications regulator in April 2022. Telecommunications companies (telcos) had been lobbying for a 90% reduction in the spectrum reserve price, however, analysts note that the reserve price is only 35-40% below April 2018 levels.

Although reserve prices are higher than requested, analysts at Kotak Institutional Equities expect telecom operators to participate in the auction and take a significant amount of spectrum to enable the rollout of 5G services in India. The deadline for submitting bids is July 8 and the start of the auction is scheduled for July 26.

However, analysts at Motilal Oswal Financial Services Ltd point out, history shows that telecom operators tend to invest heavily in telecom auctions to compete. “This could be a key overhang on the shares. Vodafone Idea Ltd could notably participate to some extent given the lower initial investment,” said the Motilal Oswal report dated June 16.

The report further adds that strong free cash flow of over Rs20,000 crore and Rs25,000 crore for Bharti Airtel and Reliance Jio, respectively, is sufficient to meet its 5G spectrum investments, without increasing debt. “But the risk of higher capex to 5G increases in the absence of a sharp price drop,” the report said.

Additionally, companies wishing to set up non-public captive networks can obtain spectrum directly from the Department of Telecommunications. Provision for enterprises remains a concern given that the 5G opportunity is a game on enterprise solutions rather than retail consumers, the Kotak report said. Investors should note that this provision is not yet finalized and will be a controllable key in the run-up to the auction.

Meanwhile, besides the unfolding of 5G auctions, another key trigger for the telecom sector would be price increases, which are key to the industry’s average per user outlook.

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