Morgan Stanley India telecoms report: Cash is king ahead of spectrum auctions, 'overweight' on Jio

New York: How will India’s 5 top telecom market leaders fare after the next round of spectrum auctions this summer tears into their balance sheets?

A sweeping Morgan Stanley India telecoms report for March stays "overweight" on Reliance Jio led by its high potential for savings leveraging existing licenses available with RCom.

The new Reliance Jio logo.

The new Reliance Jio logo.

Reliance Jio is gearing up for commercial launch of its fourth generation (4G) digital communication services in the second half of 2016 - pegged by CNN’s Fareed Zakaria as the "bet of the century” in his marquee Sunday show on foreign policy and global mega trends.

The Economist Intelligence Unit estimates that the coming surge in competition and tariff adjustments could ensure a “leaner but healthier industry.”

India has some of the lowest mobile tariffs out of any global telecoms market and competition is likely to become fiercer. Morgan Stanley does a deep dive into how each telecom player’s balance sheet will look after the next round of spectrum auctions and why that matters.


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RCom and Reliance Jio have signed reciprocal infrastructure agreements to share Rcom's 43,000 towers, 120,000km of inter-city fibre, and 70,000km intra-city fibre network for the next 17-20 years.

The ripple effect of hefty savings and projected free cash flows that Jio will enjoy riding on exisiting licenses available with RCom is at the heart of the Morgan Stanley Report.

The analysis comes at a time when Anil Ambani's Reliance Communications is moving towards gaining control over close to 20 percent of the total spectrum with private companies in India along with plans for airwaves sharing with Jio in all 22 circles in the 800 MHz band, reports IANS.

Spectrum auctions will "worsen the scenario"

Morgan Stanley says Jio will reap “substantial savings” by leveraging the existing licenses while other operators in the game will be hit hard by mid year. “New spectrum auctions could worsen the scenario,” says Morgan Stanley.

Telecom spectrum auctions are coming up in May 2016 and all the big players except Jio will be hit across the board on revenues as well as free cash flows because of increased interest cost and heavy capex investments, says the report.

Decoding the Morgan Stanley report, this means that if Reliance Jio were to be valued on the basis of net replacement cost - which includes but is not limited to building the assets of a Reliance Jio all over again, setting up the towers plus buying the licenses - that cost will be abundantly higher than the current “discounted” share price.

RCOM owns 11% of the overall spectrum in the country. This is how it slices up:
40% of 800 MHz
3% of 900 MHz
8% of 1800 MHz
14% of 2100 MHz.

Despite this spectrum capability, RCOM rakes in only ~6 % of India’s revenues, “making its spectrum the most underutilized amongst the operators.”

What could make Morgan Stanley “bullish on operators”?

— “Reliance Jio launch at ARMBs ( avg revenue per megabyte) close to the market, rather than expectations of a 30-50% discount
— “Double- digit revenue growth backed by strong data volume growth.”

“Underweight on Bharti, Idea”:

— “We project a lack of free cash flows coupled with RJio launch overhang. However Bharti scores over Idea here.”
— “We stay OW on BHIN, TCOM with a skew toward data growth, and RCOM as an infrastructure play to gain from RJio plus tower monetization."

For both Bharti Airtel and Idea, the interest and amortization costs of 900 MHz in the 2015 auction have started eating into their P & L, says Morgan Stanley. The burden will reflect more starkly in the fourth quarter of 2016 when these costs are recognized for the full quarter, says the report.

Morgan Stanley on future spectrum auctions:

“Will dent balance sheets further, especially for operators needing 2100/2300 MHz. If 700 MHz is put to auction, we expect to see high demand from all the operators.”
Morgan Stanley says Idea and Bharti may not be able to support current share price valuation based on P/B. RCOM’s current P/B is 0.4x F2016 P/B, an absolute all-time low.

While there is projected double digit data volume growth (which will be reflected in revenue growth), margins will come under severe pressure due to rising operating costs and spectrum license outflows.

IANS reports that the Morgan Stanley report says despite double-digit data volume growth, data revenues are now growing in the higher single-digits.

"Earnings before interest, tax, depreciation and amortisation (EBITDA) margins are under pressure, with rising opex. Leverage is up, with companies recognizing spectrum liability," it said.

Talking about Reliance Jio, the banker said: "Jio is testing 800 MHz in 10 circles and should get spectrum in eight more circles by mid-March as per spectrum trading with RCom (Reliance Communications)."

Jio is testing 800 MHz in 10 circles and should get spectrum in 8 more circles by mid-March as per spectrum trading with RCOM.

Morgan Stanley says said Reliance Jio and RCom are the only operators having an all-India footprint sub 1 GHz. "We expect to see an Reliance Jio pan-India launch in second half of 2016, thus intensifying competition further.”

Abbreviations used in the report:
BHIN: Bharti Infratel
TCOM: Tata Communications
RCOM: Reliance Communications
RJIO: Reliance Jio


(Disclaimer: Firstpost is part of Network18, owned by Reliance Industries Limited.)

Updated Date: Mar 07, 2016 09:00 AM

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