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Nov 16, 2012, 01.25 PM IST | Source: Moneycontrol.com

Lower reserve price positive for telcos: Emkay

Emkay Global Financial Services has come out with its report on telecom sector. The research firm believes that lack of participation in 4 key circles would lead to lower reserve price going forward, which would be +ve for the industry and reduce spectrum related payouts.

Emkay Global Financial Services has come out with its report on telecom sector. The research firm believes that lack of participation in 4 key circles would lead to lower reserve price going forward, which would be +ve for the industry and reduce spectrum related payouts.

  • As anticipated 2G auctions (1800MHz) concluded with muted participation from telcos, due to high reserve price. Govt. received bids for 127MHZ spectrum out of 247MHz offered for sale. Govt. would get inflow of Rs94bn with upfront payment of Rs31bn (33% upfront)
  • Delhi, Mumbai, Karnataka & Rajasthan that accounted for 51% of reserve price did not receive any bid. However, other 18 circles discovered market determined spectrum price
  • We believe that lack of participation in 4 key circles would lead to lower reserve price going forward, which would be +ve for the industry and reduce spectrum related payouts
  • Hence, we lower -ve impact of regulatory payouts from TP of Bharti & Idea. Upgrade Bharti Airtel  to HOLD while maintain reduce on Idea Cellular Revised TP stands at Rs280/Rs87 for Bharti/Idea
Key Highlights of the auction:

  • Government would garner ~Rs94bn in total and only ~Rs31bn in first year, as government had approved staggered payment options for the operators. Inflow could be much lower after adj. for earlier license fee (Rs16.6bn) of telcos who faced license cancellation by SC and participated in the auctions.
  • We were positively surprised with Bharti’s muted participation in the auction. It had bid for only 1 circle (Assam) with 1.25MHz spectrum.
  • Telenor won bids for 6 circles with total payout of Rs40bn and upfront payout of Rs13.3bn. These 6 circles account for 72% of Telenor’s AGR (Q1FY13) but it did not bid for Mumbai, Kolkata and West Bengal which accounts for 16.1% of AGR. Telenor’s approach remained selective and lower than its earlier indication of continuing operations in 9 circles.
  • Idea won bids for 8 circles (7 circles which were cancelled by SC & 1 block in Bihar). Idea also won 5bolcks in West Bengal. Total payout for Idea would be Rs20bn with upfront payment of Rs6.7bn, which was on expected lines.
  • Vodafone won bids in 14 circles with total payout of Rs11.3bn. Vodafone remained the highest bidder as far as numbers circles are concerned, we believe top up spectrum strategy is primarily to compete for revenue market share.
  • Videocon opted for 6 circles with total payout of Rs22.2bn and upfront payment of Rs7.3bn. We are still not clear on the company’s strategy.
Our take:
As expected, participation in 2G auctions (1800MHz) remained muted but outcome was +ve for the sector and weakens regulator’s stand to keep high reserve price in 4 key circles (Delhi, Mumbai, Karnataka & Rajasthan), which did not see any bidding. These 4 circles account for 56%/45% of the total spectrum renewal payout for Bharti/Idea, reduction reserve price would be +ve. However we continue to maintain cautious view on the sector. Regulatory overhang still continues on the sector as there are many unanswered questions from regulator’s end. Exact payout towards spectrum renewals, spectrum re-farming and excess charge remains uncertain as pan India reserve price remains undiscovered. Further, competitive landscape remains intense resulting in continued pressure on the profitability of the operators.

There are still many cases pending in SC pertaining to license cancellation and decision on that would be crucial for the sector. For instance, Shyam-Sistema had filed curative petition in SC, decision on the same would be crucial for other new entrants as well. In anticipation of lower reserve price in key 4 circles, we have reduced -ve regulatory per share impact on Bharti from Rs55 to Rs30 and for Idea it is reduced to Rs26 from Rs40. Revised TP for Bharti stands at Rs280 from Rs245 and Rs87 for Idea from Rs72.

Market determined price in key circles (Delhi, Mumbai, Karnataka and Rajasthan) remained undiscovered due to lack of industry participation. This clearly indicates the intent of operators for not paying such high reserve price. We anticipate this would lead to cut in reserve price otherwise there would be continued lack of participation in next round of auctions as well. We have reduced the probability of negative regulatory impact in our target price of Bharti and Idea.

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