Despite ample supply at the 14 February auction, prices in 1,800 MHz reached INR 22.7bn/MHz, 29% over the reserve price. Prices for 900 MHz in Mumbai/Delhi Kolkata rose an average 2.3x the 1,800 MHz price. Both prices were higher than we anticipated. Demand shot up mainly because of (1) incumbents’ eagerness to corner 1,800 MHz for 4G / LTE and de-risk their 900 MHz holdings; (2) Reliance Jio’s demand for 5.0-6.6 MHz across 14 Metro / A-category circles. Reliance Jio Infocomm’s entry is not worrisome, but the industry may have overpaid for data potential.
Idea Cellular’s Love for 900Mhz Spectrum
Though Idea’s acquisition of 5 MHz in the 900 MHz band in Delhi makes it slightly better positioned for 3G data, the company is still short of data spectrum, in our view, despite aggressive participation in the 1,800 MHz band auctions. We also think that Idea has tried to de-risk the upcoming 900 MHz auctions in its key circles in 2015 through 1,800 MHz bandwidth. However, it is still vulnerable to competition in the incumbent circles that are coming up for renewal in 2015.
Given 1,800 MHz has a superior ecosystem for 4G/LTE and the weak coverage characteristics of current 2,300 MHz 4G spectrum (with Reliance Jio and Airtel), we expect 1,800 MHz to emerge as an alternative band (with Vodafone and Idea also acquiring spectrum). Though ecosystem is developing in 850 MHz, the industry’s future appetite for 800 MHz auctions remains to be seen.
We think the data market has the potential for a further positive surprise with the evolving 4G ecosystem and the impending 4G launch by Reliance Jio / Airtel. We have observed anecdotal evidence of 3G traffic growth far outstripping 2G data traffic growth, especially in metros, and we think the trend is likely to be repeated in the rest of the circles.