5G Services In India Soon! Telecom Stocks to Buy As DoT Gears Up for Spectrum Auction

The much-awaited 5G services, about 10 times faster than 4G, will be rolled out soon as the Union Cabinet has given its nod to the Department of Telecommunications’ (DoT) proposal of holding a mega 5G spectrum auction. “The Union Cabinet has approved a proposal of the Department of Telecommunications to conduct spectrum auction through which spectrum will be assigned to the successful bidders for providing 5G services to public and enterprises,” a government statement released stated.

A total of 72,097.85 MHz of spectrum with a validity period of 20 years will be put to auction by the end of July. The auction will be held for spectrum in various low (600 MHz, 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz), mid (3300 MHz) and high (26 GHz) frequency bands. The brokerages also see higher reserve prices than those requested by the telecom firms and potentially greater debt for carriers as other challenges.

Shares of telecom stocks fell as spectrum remained undiscounted. Bharti Airtel Ltd. dropped as much as 3.9 per cent, Vodafone Idea Ltd was down 2.27 per cent. On the other hand, Tata Communications Ltd turned up 0.33 per cent.

Analysts said while Bharti Airtel (Airtel) and Reliance Jio (Jio) are well-positioned to participate, they are doubtful of Vodafone-Idea (VIL)‘s active participation in the upcoming auctions.

Analysts at Motilal Oswal also pointed out, that history shows that telcos tend to engage in heavy investments in telecom auctions to match the competition. “This could be a key overhang on stocks. Vodafone Idea Ltd particularly could participate to some extent given the lower initial investment,” said the note.

The report further added that a strong free cash flow of over Rs 20,000 crore and Rs 25,000 crore for Bharti Airtel and Reliance Jio, respectively, is sufficient to meet its investments in 5G spectrum, without an increase in debt. “But the risk of higher capex toward 5G does increase with the lack of a sharp fall in pricing,” said the report.

Credit Suisse said while the government is yet to come up with the modalities and pricing of direct spectrum allotment to enterprises for captive networks, this could be negative for telcos’ future 5G monetisation from enterprises, even as its use cases are still being developed. Indeed, all three telcos had publicly expressed strong views against direct spectrum allotment for captive private 5G networks, it said.

According to Nomura, despite the Cabinet approval for no upfront payment and scrapping of financial bank guarantees, it believes VIL could restrict its bid for 5G spectrum to select circles, given its capex constraints, much-delayed fund-raising and existing gaps in 4G coverage.

What Telecom Stocks to Bet on?

Bharti Airtel remains JPMorgan’s top overweight with a target price of ₹870 while OW-rated Indus Towers could benefit from successful 5G auctions. “We expect Bharti and Jio to participate in the auctions but note that telcos may be selective on the quantum this time given the likely demand-supply imbalance and annual auctions,” the brokerage added.

“We note 4G rollouts and the Jio launch had led to the Indian telecom industry consolidating from 12+ operators to a 3+1 market structure. Now, with the upcoming 5G rollouts, we think Airtel and Jio’s market share gains could likely accelerate further at VIL’s expense and Indian telecom market could end up as a virtual duopoly. Airtel remains our preferred pick among listed Indian telcos,” said Nomura in its report.

Santosh Meena, Head of Research, Swastika Investmart Ltd., said: ” This move will lead to huge advancements in the field of technology and the internet. Further, the September 2021 spectrum reforms will ease up the overall process for the telecom operators. However, the high spectrum prices could be a major dampener, and the lack of crucial infrastructure and the need to buy & upgrade to 5g headsets will slow down the overall 5g penetration process. Nevertheless, we expect good participation despite the aforementioned concerns as the overall financial health of the telecom sector is improving and the tariffs are expected to rise in the future. We are positive on Bharti Airtel Ltd. and Reliance Industries Ltd. (Jio) from a long-term perspective.

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