The removal of 3% floor on SUC along with 0% SUC on spectrum acquired in the upcoming auctions could help Indian telcos lower their SUC rate by 250-310bps, driving annual cash savings of Rs 7-21 bn. This will help offset over 70% of annual spectrum installments required to buy 100MHz block in 3.3GHz band for Bharti/Jio and offer potential upsides of 4% to fair values for Bharti/Jio. Easing regulatory levies is a structural positive. Reiterate Buy on Bharti.
Govt’s clarifications on SUC: The Govt. has released revised norms for Spectrum Usage Charge (SUC) providing clarifications on SUC applicable on spectrum acquired in the upcoming auctions. While the methodology of calculating SUC is the same as earlier, the order has removed the 3% floor rate on SUC.
Purchase in 26GHz can drive
Rs 8-22 bn net annual savings: Indian telcos hold 80-95MHz of unpaired spectrum at blended SUC rate of 2.9-3.9% (adjusted for microwave backhaul SUC) in each circle across bands. In the upcoming auctions, operators can acquire up to 130MHz/1,110MHz in 3300MHz/ 26GHz bands, respectively, which will help them lower their blended SUC rate. A 300MHz purchase of 26GHz spectrum will lead to the blended SUC rate for telcos falling to sub-1% levels resulting in annual cash savings of Rs 7-20 bn. Bharti/Jio/VIL can maximise net savings at Rs 20/21/7 bn if they buy 500/500/300MHz in 26GHz band, respectively.
SUC savings to incentivise bids in 3300MHz band: At reserve prices, Bharti and Reliance Jio will have to pay an annual installment of Rs 30 bn for 20 years to acquire 100MHz spectrum in the 3300MHz band on a pan-India basis. If they acquire 500MHz in 26GHz band then their net annual cash outflow will be lowered to Rs 8-9 bn due to SUC savings, implying an over 70% reduction in annual installments. SUC savings will also enable Vodafone Idea to acquire 50MHz spectrum in 3300MHz band in 7 circles accounting for 62% of its revenues on a cash neutral basis. If it acquires 50MHz spectrum in its top-16 markets, then the net annual cash outflow will still be manageable at Rs 6.5 bn.
SUC savings to benefit Bharti/Jio: While we build $4-bn worth of spectrum purchase in our estimates, we have not baked in the potential SUC benefits. These could raise our FY24/25 Ebitda estimates by 3-5% and our fair value by 4% for Bharti/Jio, respectively.