Telecom Reguratory Authority of India (TRAI) has yesterday recommended a reserve price of Rs 115 billion (USD 1.7 billion) per MHz for pan-India 700MHz spectrum. Fitch Ratings believes that efficiency gains from deploying 4G services on 700MHz will be insufficient to offset the relatively high price.

The rating agency said, "The top four telcos i.e Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications (RCom) may hesitate to bid for 700MHz spectrum, given their stretched balance sheets and need to preserve cash in light of impending competition from the entry of Reliance Jio in March-April 2016. The FFO-adjusted net leverage of these telcos ranges from 2.0x (Bharti) to 5.0x (RCom)."

Also, the reserve price is about 2.0x, 3.4x and 4.0x of the recommended reserve price for 800MHz, 900MHz and 1800MHz spectrum, respectively. As such, the price for 700MHz spectrum could exert further pressure on participating telcos' balance sheets and cash flow, and limit their ability to invest in capex over the medium term.

Fitch ratings further said, "Consequently, the 700MHz spectrum auction planned in 2H16 may not be attractive to telcos, given limited device availability and that telcos possess alternative spectrum (850MHz/1800MHz/2300MHz) to roll out 4G services. For example, market leader Bharti owns about 40% of the private telcos' 900MHz, and will offer 4G services in 1800MHz and 2300MHz. Reliance Jio, after having invested about USD15bn on spectrum and networks, has access to the pan-India 800MHz/850MHz spectrum."

In March 2015, the telcos committed the largest-ever investment of USD 17.7bn, mainly due to the necessity to retain their expiring spectrum to avoid network disruption. The auction saw aggressive bidding as spectrum offered was limited. We believe that there are far fewer reasons for telcos to invest as much in the 700MHz auction.

Furthermore, the regulator's approval in September 2015 to allow spectrum sharing and trading will allow telcos to buy or share spectrum among themselves, and could make bidding in spectrum auctions unattractive. The industry is consolidating gradually into six major participants. During 2015, RCom announced its equity-merger with Sistema JSFC's (BB-/Stable) Indian unit, MTS India, and has further plans to merge its wireless unit into Maxis Berhard's Indian unit, Aircel.

Fitch believes that smaller and weaker telcos will further seek M&A or exit the industry, in light of the high spectrum prices and stretched balance sheets. Videocon India, one of the smaller firms which is struggling, has agreed to sell its 4G spectrum assets to the third-largest telco, Idea Cellular.

Fitch has a negative outlook on Indian telcos for 2016. "We expect competition to intensify upon Jio's entry in the market, as it is likely to provide cheaper and faster data-focussed tariff plans armed with sufficient spectrum and access to funds. Blended monthly average revenue per user could fall by 5%-6% to around Rs 160 (2015: Rs 170) due to a decline in data tariffs, which will more than offset the rise in data usage. The top-four telcos' average operating EBITDAR margin will narrow by 100bp-200bp (2015: 35%) due to competition and greater marketing spend," it added.

The telecom regulator's recommendations on the reserve price of a spectrum are subject to approval by government.