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Brokerage firm Credit Suisse (CS) estimates the government is likely to budget a $25 billion spectrum sale from the upcoming auctions (2016), out of which approximately 30% of value of spectrum is expected to be sold at TRAI reserve prices.

CS further explains that the 700 MHz spectrum will see only a partial success, as TRAI’s recommended price of Rs 11,485 crore for the 700MHz band is 25% higher than CS’s estimates. It says this could be a negative surprise to some players in the market, as all spectrum bands, including the crucial 2100 Mhz and 700Mhz band are expected to be sold at a whopping $80 billion.

The brokerage firm estimates that out of the total $80 billion worth of spectrum, only a partial $10-15 billion in sales would be generated in the upcoming auction, mainly sustained by the:

– Easy availability of financing by the government from telecom players
– Acute shortage of spectrum in the market in light of rapidly growing data volumes
– Operator specific spectrum gaps for most operators.

CS projects that receipts from telecom sector for FY17 are expected to be ~$14 billion (~Rs 990 billion). This could include:

– Recurring license and spectrum fees revenues of ~$3 billion (Rs 220 billion)
– Deferred payments from past auctions amounting to ~$965 million  (Rs 65 billion)
– One-time spectrum fees of ~$2 billion (Rs 200 billion)
–  The balance of ~$7 billion (~Rs 500 billion) likely from upcoming spectrum auctions.

Situation vulnerable for players other than RCom and RJio
According to CS, if the announced spectrum sharing pact between RCom and RJio succeeds, RJio could have the best spectrum footprints with sub 1GHz spectrum in 18 circles covering 75% of industry revenues.

While, Bharti’s 900Mhz spectrum with similar revenue coverage are mostly being used for deploying 2G services. Readers would remember that last month, Gopal Vittal, Airtel India’s CEO said that if the government goes ahead with the TRAI-proposed reserve price for the 700 MHz, “we believe we cannot afford to buy that spectrum at that price.”

These factors together makes the situation grim for other telecom players, forcing the sales of 700 MHz to be lower than expected, adds CS in its report.

Operators save tax if they don’t show revenue
The government recently proposed the addition of a 0.5% cess on services (Krishi Kalyan Cess), taking the total service tax rate to ~15%. “In the past, we have seen that telcos have struggled to pass on such tax increases to subscribers,” adds CS. In addition, service tax on spectrum transfer will have less impact according to CS as the as the companies can set-off this service tax against the regular service tax liability. Operator will not be taxed on new spectrum purchases if they do not show any revenue.

Note that the 2015 spectrum auction totaled to Rs 1,09,874 crore— 36.86% higher than than the Rs 80,277 crore the government had targeted from the auctions, based on the reserve price set by TRAI.

Also read: Lowdown on liberalization of 2G spectrum guidelines

Our spectrum coverage.