Indian 5G Auctions— What predictions can we make based on the past trends?
Indian 5G spectrum auctions will start just in a couple of days. In order to predict how the operators might bid, it will be useful to look at the historical trend of past auctions. While doing so we will also look at the total EMD (earnest money deposit) submitted individually by the operators and how this might impact the overall auction outflow. EMD is important as it restricts the operator's capability of bidding to only that amount of spectrum which maps to his submitted EMD value. While analyzing this data we will also understand typically how much of the submitted EMD value typically gets consumed by the operators at the end of an auction. Let's begin.
EMD Past Trend
The following picture provides us with a snapshot of the trend of EMD values for all the past auctions.
From the above figure, we can clearly see that in the year 2010 the total EMD submitted by all the operators together was Rs 5,806 Cr vs a total EMD of Rs 2083 Cr for all spectrum put up for sale. The ratio between the two comes at 2.78. At the end of the auction, all 100% of the Total EMD was consumed, individually the operators might have consumed less. This increased value of submitted EMD was indicative of a very competitive auction, and the final outflow when many times the valuation of the spectrum at the reserve price.
In the year 2012, the total EMD submitted by all operators together was less, i.e at Rs 3383 Cr vs the total possible EMD for all spectrum put up for sale at Rs 7535 Cr. This was indicative of a subdued auction, and so it was. At the end of the auction, all the operators put together only consumed an EMD value of Rs 1647 Cr — 21.8% of the total EMD of the spectrum up for sale.
In the year 2013, the EMD submitted as just Rs 614 Cr vs a total possible EMD of all spectrum up for sale at Rs 5444 Cr. At the end of the auction, just 10% of the overall EMD (of all spectrum up for sale) was consumed. MTS even did not consume fully it submitted EMD and ended up using just 84% of it.
In the year 2014, again the total EMD value submitted by all the operators was higher (Rs 11560 Cr) than the EMD (Rs 9060 Cr) mapped to the total spectrum up for sale. Note this was the year of the first renewal auction, and in the end, the operators end up consuming Rs 7655 Cr. Also, note that except for Idea which consumed 91.2 % of its submitted EMD, the rest ended up consuming much less (<70%).
Now, again in the year 2015, the total EMD value (Rs 20436 Cr) submitted by all the operators was significantly higher than (>2 x) than the EMD value (Rs 10,992 Cr) mapped to the total spectrum up for sale. At the end of the auction, 87% of this value (Rs 10,992 Cr) was used up by the operators. But except for Idea, all the operators end up consuming between 50% to 70% of their submitted EMD value.
In the year 2016, the operators together submitted only 25% of the total EMD mapped to the spectrum up for sale. And ended by consuming just 13%. Note that RJIO just consumed 23.4% of its submitted EMD value and all others consumed anything between 70% to 85% (actual values embedded in the figure above). This indicated a very subdued auction.
Then again in the year 2021, history repeated itself. The operators together submitted just 27% of the total EMD value mapped to the spectrum up for sale, and in the end, just consumed 22% of the submitted value. RJIO ended up consuming 78% of its submitted value and Bharti consumed 88%.
Now in the current auction (the year 2022), the operators together submitted an EMD of 45% of the total that can be mapped to the spectrum up for sale — indicating the auction will be a subdued one and a lot of spectrum will lie unsold at the end of the auction — that year 2016 & 2021.
Outflow Past Trend
The following picture provides us with a snapshot of the trend of outflow values for all the past auctions.
One can clearly see from the above chart that in the year when the submitted EMD values of all operators exceeded the mapped EMD value of all spectrum put up for sale, then the auction outflow that year also increases exponentially. Take the year 2010 (Rs 76664 Cr vs 14,330 Cr at RP), and then in the year 2014 (Rs 61162 Cr vs 42363 Cr at RP), and again in the year 2015 (Rs 109875 Cr vs Rs 65463 Cr at RP). All these values are embedded in the figure above.
Conclusion
It is clear from the above discussions we can conclude the following:-
a) Total EMD values submitted by the operators indicate the intensity of demand. If the submitted EMD value is greater than the EMD value mapped to the spectrum up for sale then one can be sure of a competitive auction, and all embedded designs in the auction can be put to good use to make a proper price discovery;
b) EMD value submitted by an operator has never been fully utilized in the past. The ratio varies widely but has never been 100%. Typically it lies between 70 to 80%, and sometimes even lower. There have been many cases in the past when operators have submitted higher EMD but ended up utilizing only a small fraction;
c) When the submitted EMD value exceeds the EMD value mapped to the total spectrum up for sale, only then we can anticipate a competitive auction lasting for many rounds, and increased overall outflows;
d) In the 2022 auction, the EMD value submitted by all the operators together is 45.6% of the total EMD mapped to the spectrum up for sale — indicating a subdued auction lasting for only a few rounds, and all spectrum will get sold at reserve prices with no price increase and a bulk of it will remain unsold. Also, the operators will end up consuming a fraction of their total submitted EMD value, if not this auction might turn out to be an exception.
(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.
