Telecom Services

14-Jan-2018

Investment intensity to remain high this fiscal; will moderate post 2017-18

CRISIL Research expects the mobile services segment to attract continued high investments over the next five years. A large
proportion will be directed towards network investment to expand 4G services on a broader scale. In addition, deployment of
advanced technologies like MIMO will increase the investment. Regulatory investments are estimated to get some relief as the
deferred payment period has been increased and the interest rate for delayed payment has been lowered.

Network investments set to increase with deployment of new technologies

Network investments have increased over the past 2-3 years, with the industry transitioning from a voice-dominated to a data-
driven one. Players are keen on investing in data networks to widen their 4G coverage, while adding capacity simultaneously to
handle future data traffic growth. In addition, the stringent quality norms devised by TRAI for call drops will compel players to
improve network quality which will increase investments.

Majority of the spectrum auctioned in October 2016 was bought in the 2300 and 2500 MHz bands, which entail higher network
investments. With 4G coverage already being provided on the 1800 MHz band by the incumbents, these two spectrum bands will
be used by the operators to add data capacity in the form of carrier aggregation, which will increase network capacity, thus
improving data-handling ability. Operators are expected to start rolling out new networks over the next couple of years, thus
leading to increased network investments.

Also, players are focusing on deployment of advanced technologies like MIMO (Multiple-Input Multiple-Output) in order to make
the network future ready for meeting data explosion in future. This technology is expected to expand existing network capacity by
5-7 times, leading to faster data speeds and delivering better customer experience. Bharti Airtel has already started its first round of
deployment in Bengaluru and Kolkata.

CRISIL Research believes the operators intend to expand their network in under-penetrated rural areas that had a tele-density of
just 56.3% as of September 2017. Additionally, the spread of mobile broadband (3G and 4G) services to more areas, particularly
by large operators, will fuel mobile service investments.

Regulatory and network investments

Increase in deferred payment period to reduce payment outgo

The telecom industry is currently reeling under the burden of the huge capital expenditure it had to incur to acquire spectrum in the
past three auctions. In March 2015 alone, operators bid Rs 1.1 trillion for airwaves, where majority investments were made to
reacquire expiring spectrum.

The October 2016 spectrum auctions witnessed moderate participation with operators eventually acquiring ~41% of the 2,350
MHz of spectrum on offer. Operators have committed Rs 658 billion, half of which will be upfront payment to the
government. Unlike the previous auction, there was no business compulsion to acquire spectrum in October 2016. Vodafone and

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 Idea had to augment their spectrum holdings and network capacity to cater to the burgeoning growth in data traffic and compete
with Reliance Jio. Consequently, the entire spectrum in the 2300 MHz band, ~80% in 1800 MHz and over 60% in 2500 MHz,
which can be used to offer 4G services, were bought. There were also bids for spectrum in the 2100 MHz band, largely used for
3G services, mainly in select low data penetration markets (Category B and C circles).

The October 2016 auction has consolidated the competitive position of Bharti Airtel, Vodafone and Idea. Reliance Jio, which has
also fortified its spectrum holdings at this auction, will pose stiff competition. These four operators cumulatively account for over
90% of the aggregate spends at the auction.

For the first time, telcos have abundant spectrum. Hence, no spectrum auction in fiscal 2018 has been assumed for our
analysis. Over the medium term, we also believe that auction for 5G spectrum will not take place as the ecosystem,
globally, is still in a nascent stage and there would not be many takers for the spectrum till the devices and ecosystem
are in place.

Payment schedule for auctions

Source: Telecom Regulatory Authority of India, Department of Telecommunications, CRISIL Research

CRISIL believes the debt levels of telecom operators will mount as installments for auctions held in fiscals 2013, 2014, and 2015
are due in fiscal 2016 and forward. The October 2016 auction will also exert additional pressure on the already stressed balance
sheets of major telecom operators. However, the industry will received some relief as the deferred payment period for spectrum
purchase has been increased from 10 years to 16 years. Also, the interest rate has been lowered from PLR to MCLR plus 4%.
Thus, it will decrease the outgo and provide liquidity to players.

Investments in networks to remain high with greater 4G rollouts; consolidation may hinder
tenancies

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 Expansion of services by operators (primarily in rural areas), the roll-out of 4G services (necessitating BTS installations) and data
traffic surge (estimated ten-fold increase over fiscal 2017 to 2022) will lead to base transceiver station (BTS) additions. Net BTS
additions in 2015-16 stood at ~285,000 compared with 68,994 in 2014-15, as operators upped the pace of expansion of their
service offerings. Between fiscals 2016 and 2017, telecom operators have aggressively added BTSs to roll out and expand 3G and
4G services, following the entry of Reliance Jio. The total number of BTSs are expected to increase 1.2 times from ~1.45 million in
March 2017 to ~1.84 million in March 2022.

An estimated break-up of player-wise BTS shows most of the incremental BTS addition in fiscal 2017 was by Reliance Jio
(150,000-160,000 BTSs). Other operators added 50,000-60,000 BTSs each. Over the long term, operators will look to increase
penetration in rural areas, leading to higher incremental addition in these regions. Players will also add capacity BTSs to handle
the ever-growing data traffic. However, additions will be limited as operators achieve coverage in key circles.

Incremental BTS additions to peak in fiscal 2017

E: Estimated; P: Projected

Source: CRISIL Research

Player-wise estimated BTS additions in fiscal 2017

Source: CRISIL Research

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 On the other hand, the ongoing consolidation in the industry will reduce demand for BTSs as the merged entity will remove
duplication and infrastructure will be shared. For example, the Idea-Vodafone merger expected to be completed in calendar
year 2018, is expected to result in a moderation in tenancies in the short term.

Bulk of active infrastructure investments will be on 4G services

CRISIL Research expects cumulative network investments of over Rs 2.8 trillion to flow into the telecom space from fiscal 2018 to
2022. The bulk would be in the mobile services segment, including the roll-out and spread of 4G services. The balance would be
channeled towards wireline and broadband infrastructure (primarily in large cities), and setting up of infrastructure for long distance
and data services.

Active infrastructure, primarily comprising radio equipment and backhaul, is expected to account for over 70% of total network
capex during fiscal 2018 to 2022. Network expansion will mainly be driven by operators expanding their 4G services, and rural roll-
outs.

Other network capital expenditure, comprising core and transmission, is expected to be ~Rs 0.4 trillion over the next five years
(fiscal 2018 to 2022), similar to the capex during the last five years. Transmission capex is expected to stabilise and finally start
reducing over the next 2-3 years as the government adds villages under its ambitious National Optical Fibre Network project, now
known as Bharat Net, under which, 2,43,845 km of fibre has been laid as of November 2017.

Network investments forecast

E: Estimated; P: Projected

Source: CRISIL Research

Major consolidation through the merger of Vodafone and Idea, Bharti Airtel and Telenor & Tikona & Tata
Teleservices will lead to some synergies in the form of lesser network operating and capital expenditure in future.
However, this has not been considered in our analysis. Need for additional spectrum in future will also get subsidised
following consolidation.

Key assumptions for investment forecast:

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 Operators would expand 4G services across larger cities and then move to tier-III cities and beyond, entailing high
investments over the next 1-2 years.

Wireless data subscribers in urban areas would shift to 4G with attractive data tariffs being offered by telcos. Large-scale
migration from 2G to 4G services and from 3G to 4G services is expected in urban areas but migration of 2G and 3G
subscribers is also expected to pick up pace as players are increasing their focus on 4G services. RCOM has already
decided to shut its 2G business by November end. Also, players like Bharti Airtel are considering shutting down their 3G
services over the next two to three years.

The cost of active infrastructure has been estimated on a per line basis separately for 2G, 3G and 4G services.

Private players would invest in fixed-line infrastructure where it is economically viable. Wireline services would be positioned
as a triple play, i.e., capable of simultaneously providing voice, video and data facilities on the same network.

Risk to investments will be primarily related to uncertainty in government policies and technology changes (newer
technologies will necessitate fresh investments).

While laying 5G road map is on the cards, deployment is still far away

There has been a paradigm shift in the usage of technologies from 2G to 3G and now from 2G and 3G to 4G. Although, 4G is still
developing in India, the government wants to be ready for next-generation mobile technology i.e. 5G. The global standards for 5G
are still not set but many countries have announced their planned launch. Globally, players such as Alcatel-Lucent, Ericsson,
Huawei Technologies, Nokia Solutions and Networks, AT&T Inc., have started investing in development of 5G technology.

On account of its significantly higher speed compared to previous technologies, 5G is expected to open up new networks like
Internet of Things (IoT). It will also enhance broadband access and provide massive support to fields like robotics, augmented
reality (AR), virtual reality (VR), medicine, automotive technology (self-driving car), etc. Further, machine-to-machine (M2M)
communications and machine-type communications (MTC) that will be a part of 5G networks will enhance the way traditional
communication is done and open up a gamut of opportunities in the automated technologies space.

In September 2017, the Government of India constituted a 'High-level 5G India 2020 Forum'. It is aimed at rolling out 5G technology
in India by 2020. Primarily, the forum is set to achieve early deployment of 5G in India and to position India as a globally
synchronised participant in the design, development and manufacturing of 5G-based technologies. The move is also aimed at
leveraging technology for deployment of next-generation broadband infrastructure to have 100% coverage of 10 Gbps broadband
across urban India and 1 Gbps across rural India. Further, it is believed to push the 'Digital India' and 'Make in India' initiatives of
the government. An estimated budget of ~Rs 5 billion has been allocated for Research & Development of 5G services. The
investment will be done by three ministries — Telecom, Electronics and IT ( MeitY), and Science and Technology.

Among other countries, South Korea is expected to launch its 5G services as early as in 2018. In the US, leading telecom
giants such as AT&T, Verizon, T-Mobile and Sprint are already testing 5G components. China and Japan are aiming to launch 5G
services by 2020.

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 We believe that India still has a long way to go before 5G services are launched as players are currently focusing on rural areas
that have huge untapped potential. Also, they are keen on migrating existing 2G and 3G subscribers to the 4G platform. Along with
this, the device ecosystem for 5G is yet to be evolved and spectrum auction is also not expected over the next couple of years,
given the highly leveraged situation of the industry as of now. Just like it did with 4G services, India would look to launch 5G
services after it is launched in the Chinese market in order to achieve economies of scale, which will help in faster adoption of 5G
services.

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