Sanju Verma of Violet Arch Securities says TRAI's recommendations are clearly in favour of Reliance Industries.
Earlier this week, TRAI recommended setting the reserve price for the 2G auctions at Rs 3,662 crore, almost 13 times the amount in 2008. Sanju Verma of Violet Arch Securities says this move is clearly in favour of Reliance Industries.
According to Verma, the policy is not in favour of incumbents Bharti, Vodafone and Idea, who will have to shell out a total of Rs 95,000-1,00,000 crore to retain their existing spectrum once it expires in 2014.
On the other hand, she believes the government has gone out of its way to make the policy beneficial for RIL-owned Infotel. “The government has said that it will not allow new players to bid for the 4G airways before 2015, indirectly giving Reliance a head start of two-three years,” she said.
Another factor which she thinks will benefit Reliance is the freeing up of internet telephony services. “People who operate in that particular airwave spectrum will be the biggest beneficiaries and the likes of Bharti are going to get adversely impacted because nobody will want to pay 60-70 paise per minute to make an international call when you can make an international call from your landline at 1/10th to the price,” she explained. Since this facility is only offered by Reliance Infotel today, Verma says this policy is very partial towards Reliance Industries.
Telecom was one of the fastest growing sectors a few years back, with companies adding close to 15-16 million subscribers per month. This number has fallen to 5-6 million, indicating the deceleration with respect to incremental growth in the sector. Due to this, Verma advises staying away from this space altogether. With companies having to pay Rs 40,000-50,000 crore just to stay in the business, Verma questions the viability of doing business in India.
Below is an edited transcript of her interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: Since we last spoke, there have been a lot of developments for the market but the April series has been absolutely flat. What do you expect to see in May and June?
A: The FII flows tells you the story with respect to the tepid performance in April. For January and March 2012, FII inflows were in the region of USD 8-9 billion. Come March, that dramatically dropped to something like USD 1.7 billion. In April that decelerated further, and as we speak, I am told the FII inflows number for the month of April to date has barely been a tepid USD 122 million or thereabouts. So clearly the fact that the FII flows were driving the market is a foregone conclusion.
That being the case, and given that the GAAR issue has been top of the mind for most foreign investors for the right or wrong reasons I am not surprised that the market is in a tepid mode. They will perhaps continue to be likewise in the next two months
Having said that, I am not particularly perturbed by this whole brouhaha about the downgrade in the outlook by S&P because that is something which has caught the fancy of almost anyone who has anything to do with the market. My personal sense is we perform best under pressure.
This is a clarion call to the government to get its act together. My personal sense is that you might see a lot more happening from a positive standpoint with respect to reforms getting that necessary boost because we have seen precious little in the last 3-3.5 years odd. Before we go into general elections, assuming we don't have midterm elections, I think now is the time to actually get the act together and the government perhaps have woken up if the comments of Pranab Mukherjee are anything to go by.
Q: There is quite a bit of concern with regards to regulatory interference and telecom is a big example of that this series. How would you approach telecom stocks now?
A: Telecom I think as a sector right now I would stay far away from it. My personal sense is that to say that there is regulatory interference would actually be a bit of an understatement. I think there is a huge regulatory mess in telecom, best exemplified by the fact that a little less than a year back we were adding 13-17 million subscribers a month and see how dramatically that number has fallen to just about 6-7 million subscribers a month. That indeed tells you the story about the deceleration with respect to incremental growth in the subscriber base which I think is a very important parameter if one has to look at the telecom sector in its entirety.
My personal sense is that the telecom policy is not a policy in favour of incumbents. When the government cancelled 122 2G licenses a few months back, everybody said the Supreme Court has decided to cancel the licenses because the government wants to favour incumbents like a Bharti, Vodafone, Idea and it does not favour new players like Loop, Uninor, Etisalat etc. My personal sense is that if you look at the policy announcements in the last one week, this policy is actually not even in favour of incumbents. If the TRAI recommendations with respect to reserve price for the 800 and 900 megahertz bands come into effect, I think the biggest losers will be Bharti, Vodafone and Idea.
Just to retain it's existing spectrum, Bharti will have to pay something like Rs 30,000 crore at the current reserve price when its license comes up for renewal in 2014. Vodafone will have to pay Rs 45,000 crore and Idea Rs 15,000 crore. So the top three players will have to shell out something like Rs 95,000-100,000 crore just to stay in business and renew their spectrum and their licenses, something which they due fully bid for a couple of years back.
This policy is certainly a pro-Reliance policy that is very clear, because the government says that we are not going to allow new players to bid for the 4G airways before 2015. So indirectly it has given Reliance a head start of two-three years. On the other hand, existing players like Bharti have been hit with a double whammy. In 2014, the government said it will give Bharti the 1,800 MHz spectrum but it will take away the 900 MHz and reauction it for Rs 15,000 crore per megahertz for a pan India spectrum. So my personal sense is this is very much a pro-Reliance policy because it neither favours incumbents nor favours the new players.
Clearly something that needs to be seen is that today if Uninor were to come back into the game, it will have to pay something like Rs 18,000 crore just to get a basic airwave of 4.4 MHz. If Sistema Shyam has to come back into the 2G space, it will have to pay something like Rs 36,000 crore to get something like 5 MHz, given that 1MHz for a pan India spectrum will now cost Rs 14,470 crore. So I think that this is not a policy which favours the telecom space; it has been done mindlessly to kill the telecom space.
One thing which nobody is talking of is the announcement of freeing up internet telephony. I think that is a big positive for Reliance because if you free up internet telephony, what you are telling a telecom subscriber is you do not need to use your cell phone to make international calls, you can make an international call from a landline. So people who have access to broadband telephony, people who operate in that particular airwave spectrum will be the biggest beneficiaries. The likes of Bharti etc are going to get adversely impacted because nobody will want to pay 60-70 paise per minute to make an international call when you can make an international call from your landline at 1/10th to the price. That is a facility which is only offered today by Reliance thanks to the fact that two years back it acquired Infotel giving it access to broadband telephony.
So I think this policy certainly lacks logic and it’s very partial in favour of Reliance Industries. I think we will have to wait and see how this whole thing pans out because everyday there is a new regulatory announcement on the telecom front. A sector which was growing at 30-40% compound annual growth rate (CAGR) growth, both in terms of topline and bottomline, is today actually struggling to even post 14-15% compounded growth in terms of revenues and profitability. Existing players have to pay Rs 40,000-50,000 crore just to stay in business, so as one of the leading telecom operator said, it’s better to shutdown telecom companies and perhaps do business in some other geography.