Telcos to benefit from auction; Idea best bet: JM Financial

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Telcos to benefit from auction; Idea best bet: JM Financial

Supreme Court's move to cancel 2G licenses yesterday was a bold move, says the senior telecom analyst at JM Financial, Sanjay Chawla, adding that this development will be positive for the sector.

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Supreme Court's move to cancel 2G licenses yesterday was a bold move, says the senior telecom analyst at JM Financial, Sanjay Chawla, adding that this development will be positive for the sector.

"The main beneficiaries of the verdict will be Bharti , Vodafone and Aircel," he said in an exclusive interview to CNBC-TV18. However, his top bet in the space remains Idea . "The stock might be impacted by Rs 3 per share, but our target is Rs 110," he said. On the flip side, he expects lack of clarity on dual technology to be an overhang for Reliance Communications and Tata Teleservices .

Talking about the upcoming spectrum auction, Chawla says that he doesn't expect the bids to be very aggressive. "They might even come in lower than TRAI recommendations," he said.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Is the Bharti stock doing the right thing in the light of the announcements yesterday?

A: Absolutely. The verdict that came from the Supreme Court yesterday was a very bold judgment and it is actually pushing the industry, the government and TRAI in the right direction, which is basically to go for a 2G auction. We haven't had a 2G auction in the last 10 years, the last one happened back in 2001, so this is a right move.

There would be some modification in terms of how to deal with very serious players like Telenor who have invested more than USD 2 billion in India and also companies like Idea who applied for licenses back in 2006 but were bunched up with license allocations in 2008. Incumbents like Bharti, Vodafone and also Aircel who were not entangled in this verdict are the major beneficiaries.

Q: What does it mean for Idea, where people believe that it's a bit of a mixed bag? On the one hand they might have some of the upsides of Bharti, but on the other hand they are getting dragged into this license cancelling etc. How do you map it for them?

A: Well overall it should be quite positive for Idea as well. As I said, their case is slightly different because they had applied for those seven licenses back in 2006 but their applications were kept pending; this point was also been mentioned in the Supreme Court judgment. So they may have a case where they may ask to be kept out of any auction and continue in the present stake.

But even otherwise, even if they have to pay additional spectrum cost to continue business in those seven circles, we don't think it would be a very significant drag on the financials. It should not be more than Rs 2-3 per share for Idea.

Q: What about Reliance Communications? How have you assessed the impact for that name?

A: There is some uncertainty also with regards to the fate of the GSM spectrum which was given under the dual technology license policy to both Reliance Communication as well as Tata Telecommunications. So at this stage we don't know what kind of outcome would there be for the dual technology players, but it maybe a possibility that based on this particular judgment, even the GSM spectrum allocation to dual technology licenses would be challenged.

Therefore, there is a risk that Reliance Communication and Tata Telecommunications both may have to pay higher amount for spectrum to continue in business in those circles where they got the GSM spectrum. So it's quite uncertain for Reliance Communication at this stage and there is a potential downside.