Telecom sector expert Sanjeev Aga says structural reasons impede merger and acquisition (M&A) in telecom sector in India. He believes the specutrum shortage is artificially created.
The Telecom Regulatory Authority of India (TRAI) on Monday proposed a cut of up to 60 percent in minimum auction prices for mobile phone spectrum in a response to lukewarm interest from telecom companies in two previous sales. The proposed price cuts by telecom regulator could get a positive response from carriers such as Bharti Airtel and Vodafone Group Plc's local business.
Ankur Rudra, VP institutional equities of Ambit Capital sees an upside for Bharti if TRAI recommendations are accepted. “Spectrum pricing cut posiitve for telecom sector," he told CNBC-TV18.
Below is an edited transcript of the discussion.
Q: What did you make of the spectrum price cuts, will this be the last of the cuts?
Aga: There is too much emphasis on the reserve price but let me take the recommendations as a whole there are three-five important legs to it. The first one, the simpler ones are encouragement to spectrum trading which is good, rationalization of spectrum usage charges which is logical and should have been done long back. A move towards getting more spectrum from the extended GSM band is also positive. This TRAI recommendation of yesterday has not created the issue of refarming or of liberalization but it has unfortunately had to persist with problems created earlier with which I have a basic philosophical difference of opinion.
It is not the right was to do policy, however, if I take the big thrust of TRAI recommendations, if I put everything together the thrust is towards putting more spectrum into productive use, which is the exact opposite of what the government has been doing for the last five-six years, which is holding spectrum, jacking up prices. And that is how you exercise control. From that point of view, this is a very positive direction for the sector and for the economy.
Of course, it is only a recommendation. One can only hope that the government takes it up. But what is not contained in the recommendations, there are at least two more slots for 2100 MHz, which can be obtained by a very simple adjustment with the defence and there are at least one-two more stocks, which can come from the extended GSM brand.
The whole spectrum shortage is an artificial shortage. Once you get out of this artificial shortage, put spectrum into the market, the consumer will be happy, the country will be happy and the finance minister will be happy.
Q: Do you think that is also something, which can trigger or encourage more of consolidation, mergers and acquisitions?
Aga: There is a fundamental difference between 2008 and 2013. In 2008, there was the cut price warriors who were able to sustain their adventures based on ability to get equity from suckers and to get banks to evergreen loans. Times have changed, now businesses are 15-16 years old, people look at cash flows. And if you won't get banks to restructure and if you won't get fresh suckers then you got to put in your own money to sustain this kind of adventure. And that is what is becoming harder. Therefore, you are seeing a little bit of hardening of the realised rate even though the headline rate will never go up but the realised rate is going up.
Unfortunately, to answer your question of M&A, there are structural reasons which impede M&A because at the moment M&A rules mean that you can merge without the spectrum and therefore you have this phenomenon of zombie operators which we find right now. But the moment those rules are done you will find a precipitate improvement in rationalization. So you have to wait a bit.
Q: What could be the impact be on a company like Bharti Airtel and do you see the auction go through successfully this time at least because of the recommendations of that cut in spectrum prices?
Akur: Any lowering of the long-term industry cost structure from spectrum pricing is a positive for an incumbent like Bharti or for Idea Cellular. The extent of the cuts although sharp are not extremely different from what we were expecting. We were expecting lighter cuts, so clearly that is positive. The bigger positive for Bharti seems to be a bit more business friendly this time, there is a bit more of regulatory certainty.
We have seen lesser of regulatory oscillations from the four. In terms of the upside to our valuations we were buyers on Bharti with a valuation of Rs 382. We will probably see a 3-4 percent upside if these are prices at which spectrum is required. But there are a couple of steps now, one, we have to know who are the bidders when the first round comes out and more importantly if the government accepts these prices.