Indian telco regulator issued a consultation paper on spectrum auctions, proposingto auction spectrum across several bands, and asked for industry views on spectrumvaluations, timing of auctions and spectrum cap. From the perspective of telcos, thespectrum being offered in 800 MHz and 1800 MHz is very low, suggesting incrementalauctions will be largely about spectrum band in 700 MHz; however, pricing of 700 bandhas been a tricky issue. We believe if the regulator continues with its approach of gradualreduction in reserve price, we may see a few more failed auctions before the fair value ofspectrum in the 700 MHz band is derived. Additionally we believe the regulator may bebetter off considering the sharp reduction in prices for spectrum in the 2100 band, as notdoing so may see most of this spectrum remaining unsold. Separately, the regulator hasproposed spectrum in the 3300-3400 spectrum band, but there is limited clarity onquantum and pricing. Moreover, we have not seen any of the telcos in a hurry to move to5G, when 4G deployments are still at a nascent stage. If there were any spectrumauctions over the next two years, we believe participation will be restricted to Bharti andJio (not listed) only. Vodafone India (not listed) and Idea in the next two years are likely tofocus more on working out spectrum synergies and unlikely to add more spectrum.    Sector level debt at USD70bn and pending spectrum payment of cUSD22bnsuggest that there may not be much appetite for adding more spectrum. However, thingscould change in our view if the regulator decides to evaluate alternative financing options,including convertible preference shares with a nominal coupon and 3/5 year lock-inperiod. Such options may boost investor sentiment in the sector as well, in our view, asthis may reflect a conducive regulatory environment. We agree such options may demandchange in cross-holding norms, but believe such amendments are doable. Separately, wedo not see any spectrum auction before June 2018 as decisions on pricing of 700 MHzare likely to be time-consuming and consensus building may take time.    We highlight the regulator has asked for views on spectrum cap for the first time,more so in the context of spectrum auctions in the 3400 spectrum band. However, webelieve accelerated sector consolidation may see the government revisiting spectrum capguidelines in details and in our view upward revision is a possibility. This may further stepup consolidation, however, we believe current balance sheets of incumbents may preventthem from participating further in sector consolidation, leaving 4G entrants to benefit.    Valuation: We continue to value Bharti using DCF and maintain our Hold rating with a TPof INR400. We continue to value Idea using DCF and maintain our Reduce rating with aTP of INR77. For discussion on valuation and risks, please refer to page 3.

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