SC verdict on 2G scam: Advantage Bharti Airtel, Idea

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SC verdict on 2G scam: Advantage Bharti Airtel, Idea

Prabhudas Lilladher has come out with its report on telecom space.

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Prabhudas Lilladher has come out with its report on telecom space.

The Supreme Court cancelled all the 122 2G licences granted in 2008, affecting operations of 11 service providers. The operators are allowed to continue operations for the next four months as TRAI determines the transition mechanism for subscribers of these operators and also arrives at an appropriate market price for the licences. Companies intending to continue operating will have to pay the market price to do so.

The road ahead: The SC has asked TRAI to make fresh recommendations on allotment of licences within four months. TRAI has said it prefers the auction route for issuance of these licences and may release a consultation paper to determine the process. The Govt will have to act on these recommendations within one month. Operators are likely to ask for a review of the judgement.

Incumbents to benefit: With the primary impact on new entrants, incumbents like Bharti and Idea (in its 13 established circles) will benefit from moderation in competitive intensity. Some of the affected operators may not pursue fresh licences, while those who do may follow the incumbents' lead in raising tariffs, given that they will have to shell out 'market price' for the licences. The higher entry cost will also lead to a significant extension of the payback period for the affected licencees. Also, the cancellation of licences would increase the availability of spectrum to be auctioned, allowing incumbents to benefit from greater capacity for 2G services.

Positive impact on Bharti Airtel : We believe that Bharti will benefit from the structural strength in tariffs, going forward, as the competitive intensity is moderated on the back of 1) exit of few new entrants and 2) higher entry costs for those that wish to continue. While the shift in subscribers from affected operators to the incumbents will be a positive trend, Bharti is also expected to benefit from margin improvement driven by tariff strength and lower subscriber acquisition costs. Consequently, we maintain our 'Accumulate' rating on Bharti with a revised target price of Rs 409 (Rs392). However, the regulatory overhang remains, especially related to one-time charge on excess spectrum.

Idea Cellular - Positive for established circles but new circle drag to increase: The affected service areas account for ~4% of revenues and reported an EBITDA loss 9MFY12 Rs4.9bn, amounting to a drag of 11% on Idea's EBITDA. As an incumbent in its 13 established circles, Idea will reap the benefits of subscriber shift and improved ARPM. However, we believe that Idea intends to remain a pan-India player and will bid for the 9 licences to continue operations in the affected service areas. While the final entry price will most likely be determined through the auction process, it is certain to extend the payback period for its new circles. Consequently, we reduce our FY13E EV/EBITDA based target price for Idea to Rs84 (Rs94) and downgrade the stock to Reduce (Accumulate).

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To read the full report click on the attachment