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India Equity Research | Telecom Sector Update

TELECOM
3G auction update: Week 1 snapshot

Post seven days and 40 rounds of bidding for 3G spectrum, we highlight the April 19, 2010
key takeaways so far:

„ Key highlights
• Provisional pan-India 3G auction collection on Day 7 at ~INR 232 bn Devyani Javeri

(USD 5.2 bn); implies 66% of government target collection of INR 350 bn +91-22-6623 3360
devyani.javeri@edelcap.com
from 3G and BWA auction has been met. Provisional cost of pan-India 3G
licence at ~INR 57 bn (USD 1.3 bn), i.e., ~63% above the reserve price of
INR 35 bn.

• After a tepid start, ex-category C circles, the number of bidders per circle has
gradually inched up across majority of circles from ~2-3/circle to ~4-5/circle
(probably in tandem with higher activity level of ~90%). Since the
commencement of the auction, all category C circles and certain category B
circles (West Bengal, Punjab) largely continue to see negative demand.

• On Day 7, 13 of 22 circles saw excess demand (i.e., number of bidders


exceeded slots available). However, the number of bidders/circle continues to
fluctuate across circles and keeping in view auction rules, we believe players
will continue to alternate bids among circles as activity levels continue to
remain below 100% (likely at 90%).

• At the end of Day 7, Delhi circle bid is at the highest premium over reserve
price at ~96% followed by U.P. (E), U.P. (W), Mumbai, Rajasthan, and M.P.
circles with bids at 80-91% of reserve price. We believe this scenario is likely
to be replicated in other key circles (primarily other metros and category A
circles) as the auction progresses.

„ Outlook
Keeping in view the auction rules, we believe players will continue to alternate
bids among circles till activity levels remain below 100% (likely at 90% currently
keeping in view the increase in number of bidders/circle on Day 7). We expect
further multiple rounds of bidding and bidding intensity to increase once activity
levels increase to 100% (probably in a week’s time). The auction will end once: (i)
for every circle, the number of bids at the prices set in the last completed Clock
Round is less than or equal to the number of blocks available; and (ii) the Auction
Activity Requirement is 100%.

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2
Initial Price in Price in Price in Price in Price in Price in Price in Premium Excess Excess Excess Excess Excess Excess Excess
Slots
reserve Round 5 - Round 10 - Round 16 - Round 22 - Round 28 - Round 34 - Round 40 - over demand at demand at demand at demand at demand at demand at demand at
Service Area available
price (INR Day 1 (INR Day 2 (INR Day 3 (INR Day 4 Day 5 Day 6 Day 7 reserve Round 5 Round 10 Round 16 Round 22 Round 28 Round 34 Round 40
(A)
mn) mn) mn) mn) (INR mn) (INR mn) (INR mn) (INR mn) price (%) Price Price Price Price Price Price Price

Metro
Delhi 3,200.0 3 3,733 3,923 4,164 4,377 4,645 4,931 6,263.7 95.7 - 1 1 - 1 1 2
Mumbai 3,200.0 3 3,627 3,774 3,927 4,168 4,424 4,696 5,985.9 87.1 1 1 1 1 1 1 1
Telecom

Kolkata 1,200.0 3 1,360 1,429 1,517 1,594 1,626 1,691 1,742.5 45.2 - - - (1) 1 (1) 1
Category A
Maharashtra 3,200.0 3 3,627 3,811 4,045 4,251 4,513 4,882 5,333.7 66.7 1 - - - - (1) 2
Gujarat 3,200.0 3 3,627 3,774 4,164 4,595 4,878 5,126 5,387.3 68.4 1 2 2 1 - 1 (2)
Andhra Pradesh 3,200.0 3 3,627 3,811 4,045 4,251 4,513 4,743 4,935.0 54.2 1 - - - - (1) 1
Karnataka 3,200.0 3 3,627 3,774 3,966 4,209 4,424 4,603 5,079.7 58.7 - - - 1 1 - 1

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Tamil Nadu 3,200.0 3 3,627 3,811 4,045 4,294 4,558 4,838 5,492.4 71.6 1 1 1 1 1 1 2
Category B
Kerala 1,200.0 3 1,347 1,415 1,502 1,594 1,691 1,795 1,905.2 58.8 - 1 1 - 1 - 2
Punjab 1,200.0 4 1,212 1,236 1,249 1,274 1,286 1,299 1,325.1 10.4 - (1) (1) (3) (4) (2) -
Haryana 1,200.0 3 1,347 1,373 1,415 1,458 1,517 1,640 1,706.9 42.2 (1) (1) (1) (1) - - 2
U.P. (E) 1,200.0 3 1,360 1,429 1,577 1,822 1,934 2,092 2,285.9 90.5 - 3 3 1 - - 1
U.P. (W) 1,200.0 3 1,360 1,429 1,517 1,594 1,675 1,830 2,257.4 88.1 - 1 1 - - 1 2
Rajasthan 1,200.0 3 1,336 1,445 1,595 1,742 1,849 2,020 2,207.0 83.9 (1) 2 2 - 1 - 3
Madhya Pradesh 1,200.0 3 1,336 1,404 1,490 1,582 1,728 1,834 2,182.3 81.9 - - - - 1 1 1
West Bengal 1,200.0 4 1,212 1,224 1,249 1,249 1,249 1,249 1,248.6 4.1 (1) (4) (4) (4) (4) (4) (3)
Category C
H.P. 300.0 4 303 303 303 303 303 303 303.0 1.0 (3) (3) (3) (3) (3) (3) (2)
Bihar 300.0 4 318 318 318 324 328 328 330.8 10.3 (3) (1) (1) - (2) (1) (1)
Orissa 300.0 3 303 303 303 303 303 303 303.0 1.0 (3) (3) (3) (3) (3) (3) (3)
Assam 300.0 3 303 303 303 303 303 303 303.0 1.0 (3) (3) (3) (3) (3) (3) (3)
North East 300.0 3 303 303 303 303 306 306 306.0 2.0 (2) (2) (2) (2) (2) (2) (2)
J&K 300.0 4 303 303 303 303 303 303 303.0 1.0 (4) (4) (4) (4) (4) (4) (4)
Pan-India 35,000 39,195 40,896 43,299 45,892 48,354 51,114 57,187 63.4
% premium to reserve price 12.0 16.8 23.7 31.1 38.2 46.0 63.4

Provisional 3G 143,300 160,127 166,969 176,616 187,021 196,885 207,939 232,260


auction collection
% of govt target (3G &
BWA) achieved 45.8 47.7 50.5 53.4 56.3 59.4 66.4
 
Telecom

„ 3G auction update: Day 1 & 2 (9th &10th April, 2010)


Highlights
• 10 rounds of bidding completed for 22 circles. On day 2:
o Three circles see excess demand including Delhi, Gujarat & AP.
o Eight circles see negative demand including all category C circles and two
category B circles.
o 11 circles see demand equal to slots available.
• Provisional winning bid for pan-India licence is ~INR 40.85 bn i.e., ~16.8% above
the reserve price of INR 35 bn; pegs 3G auction collection at ~INR 167 bn.

We expect multiple rounds of bidding and do not view the current low demand (or
lack of demand in certain circles) to be indicative of the number of interested bidders.
Keeping in view auction rules, we believe operators are alternating their bids between
rounds. We expect bidding intensity to increase once activity levels increase to 100%.

„ 3G auction update: Day 3 (12th April, 2010)


Highlights
• 16 rounds of bidding completed for 22 circles to date. On day 3:
o Number of circles with excess demand increases to eight from three on the
previous day. Eight circles include Delhi, Mumbai, Gujarat, TN, and four
category B circles.
o Highest demand for UP (E) at six bidders followed by Rajasthan and Gujarat at
five bidders each and then Delhi, Mumbai, TN, Kerala, and UP (W) at four
bidders each.
o Nine circles see negative demand including all category C circles and three
category B circles.
o Five circles see demand equal to slots available.
• Provisional winning bid for pan-India licence at ~INR 43.3 bn i.e., ~23.7%
above the reserve price of INR 35 bn; pegs 3G auction collection on day 3 at
~INR 177 bn.

„ 3G auction update: Day 4 (13th April, 2010)


Pan-India licence cost crosses USD 1-bn mark; provisional 3G auction collection
at ~INR 187 bn (up 6% from day 3 close)

Highlights
• 22 rounds of bidding completed for 22 circles to date. On day 4:
o Number of circles with excess demand down to five from eight on day 3. We
believe players continue to alternate bids among circles and activity levels
continue to remain below 100% (likely at 80% or 90%).
o UP (E), Rajasthan, and Gujarat circles have seen the maximum premium over
reserve price to date at ~52%, ~45% and ~44%, respectively. We expect this
scenario is likely to be replicated in other key circles (primarily metros and
category A circles) as the auction progresses. Currently, premium over reserve
price for 10 other circles (including Mumbai and Delhi) is in the 30-37% range.
o Nine circles continue to see negative demand including five category C circles,
three category B circles, and a metro (Kolkata).
o Circles with demand equal to slots available rise to eight from five on Day 3.

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Telecom

• Provisional winning bid for pan-India licence at ~INR 45.9 bn i.e., ~31%
above the reserve price of INR 35 bn; pegs 3G auction collection on day 4 at
~INR 187 bn.

„ 3G auction update: Day 5 (15th April, 2010)


Pan-India licence cost at INR 48.35 bn (up ~38% from reserve price);
provisional 3G auction collection at ~INR 197bn

Highlights
• 28 rounds of bidding completed for 22 circles to date. The number of bidders/circle
continues to fluctuate across circles. On Day 5:
o Number of circles with excess demand back to eight from five on Day 4. Six
circles see demand equal to slots available. We believe players continue to
alternate bids among circles and activity levels continue to remain below 100%
(likely at 90%).
o UP (E), Rajasthan, and Gujarat circles continue to see the maximum premium
over reserve price to date at ~61%, ~54%, and ~52%, respectively. We expect
this scenario could likely be replicated in other key circles (primarily metros and
category A circles) as the auction progresses. Currently, premium over reserve
price for 10 other circles is in the range of 35-45%.
o Eight circles continue to see negative demand including all category C circles
and two category B circles.
• Provisional winning bid for pan-India licence at ~INR 48.35 bn i.e., ~38%
above the reserve price of INR 35 bn; pegs 3G auction collection on day 5 at
~INR 197 bn.

„ 3G auction update: Day 6 (16th April, 2010)


Pan-India licence cost at INR 51 bn (up ~46% from reserve price); circles with
negative demand increase to 11

Highlights
• 34 rounds of bidding completed for 22 circles to date; believe activity levels remain
below 100%. On day 6:
o Number of circles with excess demand down to six from eight on day 5. Five
circles see demand equal to slots available. We believe players continue to
alternate bids among circles and activity levels continue to remain below 100%.
o UP (E), Rajasthan, and Gujarat circles continue to see the maximum premium
over reserve price to date at ~74%, ~68%, and ~60%, respectively. Premium
over reserve price for 10 other circles is in the range of 41-54%.
o Number of circles with negative demand increase to 11 from eight on Day 5,
including all category C circles, two category B circles, two category A circles
and one metro (Kolkata).
• Provisional winning bid for pan-India licence at ~INR 51 bn i.e., ~46%
above the reserve price of INR 35 bn; pegs 3G auction collection on day 6 at
~INR 208 bn.

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Telecom

„ 3G auction update: Day 7 (17th April, 2010)


Ex-category C circles, number of bidders for majority of circles up at 4-5/circle
versus 2-3/circle in earlier rounds; pan-India licence cost at INR 57 bn (up
~63% from reserve price)

Highlights
• 40 rounds of bidding completed for 22 circles to date; believe activity levels remain
below 100% (likely at 90%). On Day 7
o Number of circles with excess demand up at 13 from six on Day 6. We believe
players continue to alternate bids among circles and activity levels continue to
remain below 100% (likely at 90% keeping in view the increase in number of
bidders/circle).
o Delhi circle is nearly at double its reserve price followed by UP (E), UP (W),
Mumbai, Rajasthan, and MP circles with bids at 80-91% of reserve price.
Highest number of bidders for Rajasthan circle at six.
o Number of circles with negative demand down to eight from 11 on Day 6,
including all category C circles, one category B circle and one category A circle.
• Provisional winning bid for pan-India licence at ~INR 57 bn i.e., ~63%
above the reserve price of INR 35 bn; pegs 3G auction collection on day 7 at
~INR 232 bn.

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Telecom

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Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Telecom


Bharti Airtel, Mahanagar Telephone Nigam, Reliance Communications, Tulip IT services and Tata Communications

EW indices Recent Research

1,600 Date Company Title Price (INR) Recos

1,400 06-Apr-10 Telecom Monthly subscriber


tracker
1,200
04-Mar-10 Bharti Proposed Zain 293 Buy
Airtel acquisition: Banking on
1,000 execution; Event Update

800 26-Feb-10 Telecom Monthly subscriber


tracker
16-Apr-09 16-Oct-09 16-Apr-10

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Telecom Visit Note

Distribution of Ratings / Market Cap


Rating Interpretation
Edelweiss Research Coverage Universe
Buy Hold Reduce Total Rating Expected to

Buy appreciate more than 15% over a 12-month period


Rating Distribution* 101 56 9 169
* 3 stocks under review Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 103 53 13

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