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3G spectrum auction remains a 1Q10 event; spectrum allotment by Aug-10

* What’s new – eGoM decides to auction four 3G-spectrum slots in Jan-10, simultaneous spectrum allotment by Aug-10: Press reports quoting the Indian Telecom Minister, Mr. A. Raja, state that post their scheduled meeting on 3G spectrum auction, the Empowered Group of Ministers (eGoM) have concluded [1] To auction four slots of 3G spectrum as per original schedule i.e. on January 14, 2010, [2] Vacation of 3G spectrum (by defence forces) and subsequent simultaneous spectrum allotment to the four winners by August 2010.

* Adherence to 1Q10 auction timeline is not surprising: The eGoM decision appears to be in line with the key takeaway from our recent meeting with channel checks on this issue (see note titled 2G, 3G Regulations – Takeaways from meetings with channel checks, dated December 11, 2009) that ‘Government finances’ is the key driver for ensuring the 3G spectrum auction is completed in 1Q10 itself and the Notice Inviting Applications (NIA), previously scheduled to be issued on 08-Dec-09, will be issued by 25-Dec-09.

* What next – await clarity on available slots, revised timetable: Press reports suggest that 4 slots of 3G spectrum excluding one slot reserved for Government incumbents (BSNL/MTNL) will be auctioned across all service areas; however, the NIA (a legally binding document) will contain the final quantum of 3G spectrum slots to be auctioned in
each service area. In our view, there is a high probability that the current auction timetable (Exhibit 3) would be pushed back by 2-3 weeks to account for the delay in issuance of the NIA.

* Implications: In our view, [1] Adherence to 1Q10 timeline is beneficial for the sector as not only will the ‘risk of overpaying for 3G spectrum’ be behind us, but the potential impact on the financials of majority of winning telcos would lower the propensity to engage in prolonged price wars. [2] If four 3G spectrum slots are indeed available for auction across all service areas, together with simultaneous allotment of airwaves, the ‘clearing price’ for securing 3G spectrum will be relatively lower, [3] As competition for revenue market share intensifies and price wars take toll on telcos’ financials, BRTI (Buy, TP Rs360) is best positioned to fund its 3G spectrum bids and use 3G offerings as an opportunity to ‘differentiate’ from a majority of its peers.

* No change in our 3G/BWA outlay assumptions for coverage stocks: Based on the 3G/BWA spectrum slots available for auction as per the Revised Information Memorandum (IM), we currently peg the clearing price of [1] one 2x5MHz slot of nationwide (ex. Rajasthan, North East) 3G spectrum at Rs63 bn, [2] one 20 MHz slot of nationwide BWA spectrum at Rs26.4 bn. Our 3G/BWA spectrum outlay assumption for coverage telcos remains unchanged – Rs60 bn (~Rs16/share) for BRTI, Rs40 bn (~Rs13/share) for IDEA, Rs12.8 bn (~Rs20/share) for MTNL and Rs19.7 bn (~Rs69/share) for TCOM.