A Rs 1.

2 trillion call
Large telcos will spend big to defend turf in the next 2 years
July 2016
Over 40% of investment needs to be met through external sources
Indias large telecom operators, which cumulatively account for three-fourth of the sector revenues, could
cumulatively invest ~Rs 1.2 trillion (Rs 120,000 crore) over the next two years to protect their turf as Reliance
Jio debuts. Over 50% of this will be spent on network augmentation and the rest to buy more spectrum and pay
instalments for previous purchases.

We believe operators will bid extremely selectively for 700 MHz spectrum to fortify market position where 1800
MHz is not available after harmonisation. Our base case is that not more than 10% of the spectrum offered in
700 MHz, and ~50-60% of the additional 200 MHz in the harmonised 1800 MHz band, will be sold. Given that
profitability and cash flows are likely to be under the pump in the near term as tariffs slide on Reliance Jios
entry, some incumbents will have to pony up equity and/or recalibrate portfolios and exit investments with low
returns to reduce the pressure on balance sheet.

Immediate outgo of ~Rs 370 billion for industry at the auctions

The spectrum auction due in the next 2-3 months is very ambitious, with the government putting up over 2,300
MHz -- the largest such chunk -- on the block. Also, for the first time, spectrum in the efficient 700 MHz will be
auctioned -- but at four times the 1800 MHz reserve price. At the March 2015 auction, business continuity
compulsions had spawned aggressive bidding. This time around, there are no such persuasions.

Which begs the question, will the upcoming auction see belligerent bids? Based on an analysis of circle-wise
market position and spectrum holdings of operators, the likely competitive scenario and projected growth in
data usage, we see bids being rather selective -- in circles of strategic importance and where operators have
limited 3G/4G spectrum. Therefore, while we expect reasonable participation at the auction, realisations may
be moderately lower than the Rs 560 billion estimated in the Union Budget for this fiscal.

The harmonisation in 1800 MHz to be done before the auction -- will lead to the availability of ~200 MHz of
contiguous spectrum across India. Consequently, interest in 700 MHz will be selective and operators will look
to plug 4G holes in leadership circles (defined as circles where they are one of the top two operators by revenue
market share) through 1800 MHz, wherever such spectrum is available.

In our base case, which assumes incumbents will go all out to protect their market position in leadership circles
(defined as circles where an operator is either the largest or second largest in terms of revenue market share),
we expect ~50-60% of the ~200 MHz of harmonised spectrum in 1800 MHz to be acquired. In 700 MHz, there will
be limited participation because players will prefer the less-expensive 1800 MHz.

We see not more than 10% of the spectrum put up for auction in 700 MHz, ~40-50% in 2100 MHz, ~70-80% in
800 MHz and the entire lot in 900 MHz being sold. Though the spectrum in the 800 and 900 MHz bands is
fragmented, operators will try to fill their network gaps this way. Interest in 2300 MHz and 2500 MHz may be
limited due to coverage limitations and, in the case of the latter, the lack of a well-developed device ecosystem.

Our base case is that the industry will have to incur a total outgo of ~Rs 1 trillion (nearly 75% by private telcos)
towards spectrum acquisition across bands. That will translate into upfront payment of Rs 370 billion. The top
three operators are expected to account for ~55-60% of the total spending at the auctions.

2
 CRISIL Researchs view is based on analysis of:

i. Data usage trends

ii. Quantum of 4G and 3G spectrum held by the top three operators and Reliance Jio
o Quantum of spectrum held in key revenue generating circles
o Quantum of contiguous spectrum (equal to or over 5 MHz) where 3G and 4G services can be offered
iii. Spectrum holdings in circles where the top three operators are in leadership position

India is witnessing a massive surge in data usage on mobile networks, routed mostly through the top 3 players.
We believe mobile data traffic will increase at a compound annual growth rate of 70% in the next three years. As
per our interactions with industry sources, a spurt in data usage could lead to increased network congestion in
the near future in high data-consuming circles (mainly metros and Circle A, which contribute ~60% of the total
Indias data traffic), unless network capacity and spectrum holdings are augmented. By fiscal 2021, CRISIL
Research believes 3G/4G data subscribers as a proportion of data subscribers will surge from the current 42%
to ~82%. This will make it even more necessary for incumbents to invest in additional spectrum.

Data usage in India (Average MB per user per month)

753
680

532

434

216 220
146
115

2012 2013 2014 2015

2G 3G

Source: Nokia MBIT Index

Aggregate spectrum holding of select telecom operators

Player 800 MHz 900 MHz 1800 MHz 2100 MHz 2300 MHz
Technology 2G (CDMA) and 4G 2G and 3G 2G and 4G 3G and 4G 4G (VoLTE)
Bharti Airtel
Total spectrum NA ~121MHz ~208MHz 100MHz 340MHz
Total spectrum in leadership circles NA ~121MHz ~137MHz 80MHz 280MHz
Contiguous spectrum proportion of total spectrum NA 100% ~90% 100% 100%
Revenue share covered through contiguous spectrum NA ~83% ~88% ~92% ~81%
Vodafone
Total spectrum NA ~83MHz ~136MHz 75MHz NA
Total spectrum in leadership circles NA ~83MHz ~81MHz 65MHz NA
Contiguous spectrum proportion of total spectrum NA 100% ~34% 100% NA
Revenue share covered through contiguous spectrum NA ~81% ~33% ~87% NA
Idea Cellular

3
 Player 800 MHz 900 MHz 1800 MHz 2100 MHz 2300 MHz
Total spectrum NA 59MHz ~152MHz 60MHz NA
Total spectrum in leadership circles NA 49MHz ~65MHz 45MHz NA
Contiguous spectrum proportion of total spectrum NA 100% ~56% 100% NA
Revenue share covered through contiguous spectrum NA ~77% ~62% ~74% NA
Reliance Jio Infocomm
Total spectrum ~82.5MHz NA ~107MHz NA 440MHz
Contiguous spectrum proportion of total spectrum ~55% NA ~93% NA 100%
Source: CRISIL Research, TRAI, DoT

Compulsion to bid to vary across operators

An analysis of spectrum holdings reveals that players with relatively lower 3G/4G spectrum holdings and limited
contiguous spectrum may need to bid more aggressively at the auctions. For instance, Vodafone has contiguous
spectrum to offer 4G services in circles that cover only ~33% of its revenue market share. In major markets such
as Maharashtra, Gujarat and Tamil Nadu, it comes up short. Idea also does not have 4G spectrum in its key
circles Gujarat and UP (West). On the other hand, players with pan-India 4G spectrum after winning it at
previous auctions and through spectrum sharing and trading deals are relatively better placed.

Based on a circle-wise analysis of these data points, we have built various scenarios on the acquisition of
spectrum at the auctions:

Scenario analysis of spectrum auctions scheduled in 2016

Buy to defend Protect your turf Conquer the market

Base Minus Base Base Plus

700 MHz - 15-20%

700 MHz - Less than 10%
1800 MHz - 25-30%
Frequencies being sold 2100 MHz - 40-50%
800 MHz 70-80%
900 MHz Almost entirely
DL, MU, AP, GJ, MH, TN, HR, KL,
Circles of Action DL, MU, GJ, MH, TN, UP (W)
Cover top 5 circles that
contribute maximum revenues
to the player with FDLTE with
preference being given to 1800
MHz and then 700 MHz
Strategy adopted
Acquire additional block in
major metros to mitigate
network congestion issues
Increase 3G coverage to pan
India
700 MHz - Less than 10%
1800 MHz 60-70%
1800 MHz - 50-60%
2100 MHz - 40-50%
2100 MHz - 40-50%
800 MHz 70-80%
800 MHz 70-80%
900 MHz Almost entirely
900 MHz Almost entirely
2300 MHz - Less than 15%
DL, MU, AP, KK, MH, TN, KL, HR,
HR, PB, UP (E), UP (W), HP, BH HP, RJ, NE, J&K
Cover leadership circles with
Cover leadership circles with
FDLTE with preference being
given to 1800 MHz and then both TD and FDLTE (with
700 MHz preference being given to 1800
Acquire additional block in MHz and then 700 MHz)
major metros to mitigate Increase 3G coverage to pan
network congestion issues India
Increase 3G coverage to pan
India

Total bid amount ~Rs 0.95 trillion ~Rs 1 trillion ~Rs 1.5 trillion

Total upfront payment* ~Rs 350 billion ~Rs 370 billion ~Rs 500 billion

*The government has changed the upfront payment for 1800, 2100, 2300 and 2500 MHz to 50% from 33% earlier; upfront payment for sub 1
GHz bands has been kept the same at 25%
Source: CRISIL Research

4
Better efficiency, resulting in lower capex, global commonality that supports ecosystem development, and
sustaining the quality of service to counter Reliance Jios 800 MHz are the key reasons that make 700 MHz
so important for incumbents.

The band is considered the most efficient for telecom services around 2.5 times more efficient than 1800
MHz, offering greater coverage area and better indoor reception. Because lesser number of sites are
required to cover a larger area, capex could come down significantly (sites required for coverage purpose
estimated at ~33% of the sites required for 1800 MHz). Coverage issues, especially indoor reach -- linked
with offering 4G on 1800 MHz and 2300 MHz may not be evident right now due to lower 4G subscriber base.
However, as the 4G subscriber base swells, the need for 700 MHz spectrum will pinch incumbents. Also,
increasing concerns over setting up roof top towers in residential areas will only make tower capex more
difficult and uncertain, especially in large metros.

Over 40 countries have already allocated, committed to or recommended 700 MHz deployments (Band 28)
with licences given in 13 countries. For India, 700 MHz is being auctioned in Band 28, which is also being
considered for launch of services in Germany, France, Sweden, the UK, Finland, Singapore, Japan, South
Korea, the UAE and Thailand. Further, close to 325 devices now support 4G on the APT compliant band.
Device manufacturers such as Apple, Samsung, Sony, Asus, HTC have handsets which support 4G on this
band. Countries with large 4G subscriber base using this band include Australia, New Zealand, Taiwan in
Asia-Pacific region. Increased adoption will support quick ecosystem development in this band.

Apart from global commonality, sustaining market position in future may also make buyout of spectrum in
700 MHz inevitable in the long run for incumbents. Reliance Jio, post its spectrum trading and sharing deal
with Reliance Communications in January 2016, will have presence across India in 800 MHz, which is also a
very efficient band with superior coverage. To counter this, incumbents will have few options other than
bidding for spectrum in the 700 MHz band, especially if contiguous spectrum in the less pricey 1800 MHz
band is limited and/or insufficient for all interested incumbents.

5
Handset ecosystem on FDLTE already quite developed globally

Number of handsets
Band Countries where available
available

700 MHz* 2,170 (323) US, Australia, New Zealand, Puerto Rico, Bolivia
Germany, Qatar, South Africa, UAE, India, Finland, Greece, UK, South Korea,
800/850 MHz 4,213
Denmark, Poland, China, Indonesia

900 MHz 1,136 Taiwan, Sweden, Indonesia, Norway, Netherlands, Singapore, South Korea
South Africa, France, UAE, Australia, Germany, India, Russia, UK, Belgium,
1800 MHz 2,847
Denmark, China

1900 MHz 1,288 US, Canada, Mexico

2100 MHz 2,324 UK, Australia, Thailand, Ghana, Poland, China

2600 MHz 2,638 Canada, Australia, China, Finland, Italy, Russia, Austria

AWS 1,231 US, Canada, Argentina, Uruguay

*APT 700 MHz (Band 28) is being auctioned in India

Note: Number in bracket refers to the number of handsets currently available in India which support APT 700 MHz (Band 28)
Source: GSA

Asset sales, equity infusion may be required to finance investments

CRISIL Research expects the large telecom operators to invest ~Rs 1.2 trillion over the course of fiscals 2017
and 2018 to finance network capex and spectrum pay-outs (both for the current auction and past auctions).
These investments are a healthy ~30% higher than the aggregate investments in the preceding fiscals.
Operators will hence have to raise substantial funding from external sources or divest non-core assets as
business profitability and operational cash flows of the sector are expected to be under pressure with the launch
of Reliance Jios services. As per our estimates, over 40% of the investment needs will need to be funded
externally and/or through divestment of assets.

6
 Investment needs of large telecom operators over next two years
~1.2

~0.9

Last 2 years Next 2 years

Figures in Rs trillion. Source: CRISIL Research

Note: Does not include any scheduled debt re-payments

In the past two years, incumbents have raised over Rs 250 billion through divestment or equity infusion. Given
the new investment needs, likely cash flow generation and leverage levels, we expect further divestments or
equity infusions in the near term.

Key deals completed/announced in the past two years

Operator Asset sold Deal value Date of deal

Bharti 4.5% stake in Bharti Infratel Rs 21.4 billion Aug 2014

Bharti 55 million shares in Bharti Infratel Rs 19.3 billion Feb 2015

Vodafone Equity infusion Rs 60 billion FY15

Vodafone 4.2% stake in Bharti Airtel Rs 12.8 billion May 2015

Bharti 8,300 towers in Africa Rs 110 billion ($1.7 billion) Oct 2015

Bharti Operations in Burkina Faso & Sierra Leone Rs 54 billion ($900 million) Jan 2016

Bharti 1,350 towers in Africa Rs 10.7 billion ($179 million) Mar 2016

Bharti* Over 5% stake in Bharti Infratel Over Rs 37 billion Apr 2016

Vodafone* IPO for Indian unit Rs 170-180 billion FY17

Source: Company reports, CRISIL Research

Note: * Based on Intent announced by companies

7
Annexure 1:

Spectrum being put up for auction and their reserve price

700MHz 2300MHz 2500MHz

Circles Reserve price Reserve price Reserve price

Spectrum Spectrum Spectrum
per MHz per MHz per MHz
available (MHz) available (MHz) available (MHz)
(Rs bn) (Rs bn) (Rs bn)

Delhi 35 15.95 20 1.43 40 1.43

Mumbai 35 11.92 20 1.46 40 1.46
Kolkata 35 5.96 20 0.33 40 0.33
AP 35 9.71 20 0.68 40 0.68
Gujarat 35 9.52 20 0.39 40 0.39
Karnataka 35 7.40 20 0.98 40 0.98
Maharashtra 35 12.72 20 0.58 40 0.58
Tamil Nadu 35 9.00 20 1.32 40 1.32
Haryana 35 1.86 0 0.08 20 0.08
Kerala 35 3.34 20 0.16 20 0.16
MP 35 3.31 20 0.08 20 0.08
Punjab 35 3.08 0 0.21 20 0.21
Rajasthan 35 3.64 0 0.06 20 0.06
UP (East) 35 4.59 0 0.09 20 0.09
UP (West) 35 3.84 0 0.12 20 0.12
West Bengal 35 1.83 20 0.05 20 0.05
Assam 35 1.58 20 0.02 20 0.02
Bihar 35 2.48 20 0.06 20 0.06
HP 35 0.64 20 0.01 20 0.01
J&K 35 0.52 0 0.01 20 0.01
North East 35 0.44 20 0.01 20 0.01
Orissa 35 1.52 20 0.04 20 0.04
770 114.86 320 8.18 600 8.18

8
 800MHz 900MHz 1800MHz 2100MHz

Reserve Reserve Reserve Reserve

Circles Spectrum Spectrum Spectrum Spectrum
price per price per price per Price per
available available available available
MHz MHz MHz MHz
(MHz) (MHz) (MHz) (MHz)
(Rs bn) (Rs bn) (Rs bn) (Rs bn)

Delhi 0 8.48 0 0 0 3.99 20 5.54

Mumbai 5 7.28 0 0 0 2.98 20 4.61
Kolkata 0 1.60 0 0 0 1.49 15 1.16
AP 6.25 6.06 0 0 4.4 2.43 20 2.72
Gujarat 3.75 2.85 3.0 6.73 4.4 2.38 15 2.58
Karnataka 1.25 3.03 0.2 5.58 0.2 1.85 15 3.28
Maharashtra 7.5 7.99 0 0 0 3.18 15 3.41
Tamil Nadu 1.25 3.60 0 0 0 2.25 15 3.44
Haryana 0 0.57 0.2 1.51 0 0.47 15 0.55
Kerala 0 2.43 0 0 0 0.83 15 1.77
MP 1.25 4.08 0 0 0 0.83 15 1.23
Punjab 5 1.19 0 0 4.4 0.77 15 0.91
Rajasthan 5 2.04 0 0 0 0.91 15 1.40
UP (East) 0 2.19 0.6 7.76 0 1.15 15 1.10
UP (West) 1.25 1.82 1.2 7.39 0 0.96 15 1.11
West Bengal 0 0.82 0 0 0 0.46 15 0.52
Assam 0 0 0 0 0 0.40 15 0.46
Bihar 0 1.36 4.6 4.44 0 0.62 15 0.86
HP 0 0.24 0 0 0 0.16 15 0.20
J&K 0 0 0 0 0 0.13 15 0.11
North East 0 0 0 0 0 0.11 15 0.12
Orissa 0 0.57 0 0 0 0.38 15 0.38
37.5 58.22 9.8 33.40 13.4 28.71 345 37.47
Source: TRAI, CRISIL Research

9
Annexure 2:

Harmonised spectrum in 1800MHz

Circle Harmonised spectrum (MHz) Price per MHz (Rs bn)

Delhi 13.0 3.99

Mumbai 5.0 2.98
Kolkata 4.2 1.49
AP 0.2 2.43
Gujarat 8.8 2.38
Karnataka 4.2 1.85
Maharashtra 13.8 3.18
Tamil Nadu 0.0 2.25
Haryana 7.7 0.47
Kerala 2.4 0.83
MP 3.1 0.83
Punjab 11.4 0.77
Rajasthan 6.4 0.91
UP (East) 5.8 1.15
UP (West) 14.9 0.96
West Bengal 18.9 0.46
Assam 18.5 0.40
Bihar 10.7 0.62
HP 11.8 0.16
J&K 32.3 0.13
North East 8.7 0.11
Orissa 0.5 0.38
201.9 28.71
Source: TRAI, CRISIL Research

10
Analytical contacts
Ajay Srinivasan Hetal Gandhi Ankush Jain
Director, CRISIL Ltd. Associate Director, CRISIL Ltd. Manager, CRISIL Ltd.
ajay.srinivasan@crisil.com hetal.gandhi@crisil.com ankush.jain@crisil.com

Media contacts
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Media Relations Media Relations
CRISIL Limited CRISIL Limited
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shamik.paul@crisil.com khushboo.bhadani@crisil.com

11
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