Indian 5G Auction — How much did it actually cost the operators?
India recently concluded the 5G auctions. The net outflow was Rs 1.5 Lakh Cr. RJIO ended up committing to pay Rs 88087 Cr, Bharti Rs 43084 Cr, and VI Rs 18799 Cr. Did you know that the cost to the operators actually turned out to be much lower? But why? This is due to the changed SUC rules. The government, as a part of the telecom package, notified that all spectrum sold in this auction will attach a 0% SUC rate. In order to understand the details of this order, please read my earlier note titled — Will 5G impact SUC, if yes, how? Now, in this note, we will try to estimate the real DCF value of spectrum cost to the operators. This we will do after taking into account the real savings in cash flows in the account of the changed SUC rules.
Calculating Yearly Instalments
In order to estimate the above value, we need to first calculate the yearly installments that each operator will end up paying every year for the value of spectrum that they ended up buying in this auction.
The details of the method are embedded in the following picture.
From the above workings, to estimate the yearly value of spectrum installments, we just have to divide the auction outflow values of each operator by a number — “11.1825”.
Hence, yearly cash outflow for RJIO = Rs 88078/11.1825 = Rs 7876.41 Cr.
For Bharti this number is = Rs 43084/11.1825 = Rs 3852.80 Cr.
And for VI, this value is = Rs 18799/11/1825 = Rs 1681.12 Cr
Calculating SUC Savings
The following picture provides a snapshot of the real SUC savings for all the operators (Source TRAI, and DOT Data of FY21–22).
Now in order to calculate the savings on account of the changed SUC rate, we need for each operator — a) Circle wise existing spectrum in MHz; b) Circle wise newly acquired spectrum in this auction; c) Current AGR (picked up for FY21–22); d) Current Spectrum Fees outflow (picked up for FY21–22); d) Current SUC % Rate (SF/AGR).
Note for the purpose of the new SUC rate calculation the TDD spectrum has been halved to align with the FDD spectrum. This is a prerequisite before w can plug these values into the formula. Also, note that the SUC for MWA and MWB has been excluded from these calculations as these rates will remain impacted.
Now the new SUC rate = Current Spectrum Holdings (2) x Current SUC Rate (4) + New Spectrum Acquired in this auction (3) x 0 (SUC rate for new spectrum) / (Current spectrum holding (2) + New Spectrum Acquired (3)
These values are individually calculated in column 5 for each of the operators. The new SUC outflow will be simple multiplication of the Current AGR (6) and the New SUC % Rate (5). These values are listed in column №8 for each of the operators. Saving is listed below each table which is the sum of current SUC outflow and new outflows calculated at the new rates.
Therefore, Bharti will end up saving Rs 2261 Cr (with new Pan India SUC rates of 0.39% from current 4.26%); RJIO will save Rs 2078 Cr(Pan India new SUC Rate of 0.19% from current 2.9%), and VI will save Rs 640 Cr (Pan Indian new SUC Rate of 0.66% from current 3.0%) in terms of annual payments on account of spectrum usage charges.
Calculating DCF Value of Net Cash Flow
The following table list the calculations of DCF values of net cash flows for the various operators for 7.2% revenue growth and 7.2 % DCF rate.
In order to estimate the DCF values of cash flows of the respective operators, we have to list their yearly outflows (column №2) and savings (column №3) for the period of 20 years. Now in order to calculate the actual cash flows, we have to factor into the savings the potential for future revenue growth. This is listed in column №4. Now for the purpose of the above calculation, I have assumed revenue growth of 7.2% per year — at par with the interest rate for spectrum payouts. The net auction outflow will be Column No2 — Column №4. The DCF values have been listed in column №6 and have been discounted by the same rate of 7.2%.
Hence, if we add up the DCF values of the operators we end up with the following numbers — Rs 46513 Cr for RJIO; Rs -2136 Cr for Bharti; Rs 6000 Cr for VI.
For RJIO the cost of the spectrum has turned out to be 52.8%, and for Bharti almost 0%, and for VI it turned out to be 32% of the overall outflow numbers as emanated from the recently held auctions.
Sensitivity Analysis
Now sensitivity analysis for various revenue growth numbers is listed in the following table. Note the % DCF rate for each has been taken as 7.2 %, and all values (except %) are in Rs Cr.
One can clearly see that the higher the revenue growth rate the bigger the saving in terms of cash flows and there smaller the DCF value of the spectrum.
Now the question that comes to our minds is why the DCF value of spectrum for Bharti is so low. The reasons are — a) Bharti’s current SUC rates are much higher than that of RJIO; b) Bharti’s spectrum outflow in this auction is just less than 50% of that of RJIO. But note after this auction, RJIO SUC rates are the lowest of all the three players and now stand at 0.19%.
Conclusion
Hence, we can safely conclude that this auction has been a win-win for all stakeholders. The operators, by grabbing a larger quantum of 5G spectrum, especially in the mmWave (26 GHz band) have been able to reduce their spectrum outflow cost in this auction significantly. This is good news for the consumers as well, as the operators will have more cash in their hands to make the necessary investments. Also, it will be in the interest of the operators to get spectrum of all kinds in the future through a process of auctions, as any administrative assignment will result in a non-zero SUC rate — leading to more operational costs. The total GOI collection at a DCF value for the base case; i.e 7.2% revenue growth is at 50,377 Cr. For this, the GOI needs to be congratulated since the above analysis clearly brings out the impact of the reforms in the telecom sector which has resulted in a positive outcome for the industry and the consumers.
(Views expressed are of my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
