Spectrum is the key commodity for Telecommunication services. Indian operators’ spectrum holding has improved in the last two years as the government has made available fresh spectrum. The top 3 incumbents (Airtel, Vodafone, Idea) and Reliance Jio have bought bulk of this spectrum. Bharti Airtel is currently the best placed – it has the highest spectrum quantity (excluding the state-owned operators) at 16% of the total spectrum, quality (33% of 900MHz) and highest percentage of revenue covered for 3G and LTE.
The stronger operators (Bharti, Vodafone, Idea and Reliance Jio) have managed to corner bulk of the fresh spectrum made available in the last two auctions. In addition, the top 3 players have also started to corner any 900MHz spectrum which has now started to come to the market in auction following renewals. Airtel is currently the best placed in terms of spectrum allotment as It controls 33% of the 900MHz spectrum followed by Vodafone – 27% of the 900MHz holding and Idea Cellular controls 23% of the allotment.
Despite the recent increase in CAPEX, Indian telcos still have the second-lowest spend amongst emerging Asian peers. Lower spend however, is unlikely to provide a window to Reliance Jio – Indian telcos historically had lower spend vs. peers, some capex is incurred by towercos, they now have higher spectrum quantity, and spectrum quality is also superior to Reliance Jio. Airtel’s higher spend vs. Idea is strategically preferable as it should ensure better network quality, and the company is also selectively rolling out LTE, which de-risks it to an extent from Jio launch. Idea just plans to undertake LTE trial runs in FY16E.
Global precedence shows that 1) network quality (through mix of spectrum and capex) is paramount at a time when data growth is high and there is a new launch on the anvil and 2) there are inherent challenges in greenfield LTE launches (lack of fallback option for voice, network quality is more important than just pricing, and it is easier to upgrade/cross-sell to existing base as opposed to induce subscribers to shift networks).
Idea Cannot Relax on Past Laurels
Idea has been executing well in our view, reflected in above-industry growth and sustained market share gains. This operating performance is being reflected in its valuation premium to Airtel. However, we believe that the future may not be as smooth, given next leg of growth is data-led where network quality (through mix of spectrum and capex) will be more critical than in the voice era, especially as new capacity (Reliance Jio) is entering the market.