TRAI auction recos: Expert assess the impact

Yesterday, the telecom regulator Telecom Regulatory Authority of India (TRAI) submitted recommendations regarding the 2G spectrum auction. It has set the 2G spectrum auction reserve price at 1.08 times of the 3G reserve price, which is at Rs 3,500 crore.

In an interview to CNBC-TV18, GV Giri, telecom analyst, IIFL and Karan Mittal, ICICI Direct, speak about the regulations and give their outlook going forward. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos. Q: There are some people who have spoken about the positives, the annual payout from the telecom companies will probably fall to 1% instead of the current 8%. Would that be good enough to atleast mitigate some of the woes of very high charges that people will have to pay for new spectrum that they will bid for? Giri: That will be quite difficult because that spectrum will anyway come with its own spectrum charges. But just retaining the spectrum that you already have itself will be quite a feat and will involve in present value terms significant outgoes. Even after taking into account the reduction in spectrum usage charges and even after looking at the scale of large operators. Q: In the current form, obviously there is a lot contention, which is doing the rounds with regards to spectrum refarming as well as the reserve price. Can you give us a sense in terms of any sort of opposition? Hence do you believe that the recommendations by the TRAI will go through in its current form? Giri: Certain parts will go through for example, we are moving from revenue proportionate cost to fixed cost. So, operators were paying for spectrum through spectrum usage charges. But here TRAI and in their reaction DoT officials seem to have adopted the concept that if you pay upfront for spectrum, you have lower spectrum usage charges and in fact very low, it’s only 1%. So, what that means is that the cost of spectrum becomes equal for everyone and not as a proportion of revenue, which means that big players will benefit and Bharti is the biggest player. Now having said, the parts, which I don’t expect to go through, will be the very high reserve prices. TRAI has given its logic. But that logic really flies in the face of practical reality. If the government contemplates using these reserve prices and structure it’s auction then there is a very real risk that no bids happen in any of the spectrum bands, in which case there is a revenue loss. TRAI has recommended all the 900 spectrum as confiscated and not given for use to any operator because no bids came then you are basically threatening the whole country’s growth and infrastructure because the country’s GDP growth will not be 6%, 7% any longer. Q: Would you agree that this could be a scenario that you will actually see auctions devolve, if you please with no bids? Mittal: I very well agree with Giri. The spectrum prices, the reserve prices are kept so high, there is a good possibility that none of the operators will come into bid for the spectrum. The another scenario, which I believe will pan out, is that Idea has got its licence cancelled in all seven circles and Uninor in all the 22 circles. If only 5 MHz of spectrum in the 1800 MHz span was to be auctioned this year then probably only one of them could actually enter the space to resume services in all these circles. That is going by the assumption, which historically TRAI has said that you need atleast 5 megahertz or 4.4 megahertz for a start of spectrum. So, again this point is also, which I believe, may not go through very well with the government. Q: If it does go through in its current form, what are the repercussions that we could see on the fundamentals of the businesses, hence on consumers? For example, there are newspapers articles doing the rounds that call rates could rise to as much as Rs 5 per minute. Can you just put things into perspective for us and give us a sense of what the fundamentals would look like, if in case it does come through? Mittal: To figure out the call prices at point of time would be a little too premature, but I believe yes, the call prices would go up because the telcos will have to sustain this kind of a price outgo. Also, it will reduce the competition level, which was about say 13-14 odd players in every circle, even though not all of them had launched their services, but we have seen a drastic fall in the average revenues per minute (ARPMs) and the tariffs. So, if the competition is limited to about six-seven players, you will see a rise in the prices, but then it remains to be seen if telcos are willing to take these spectrum at such a huge cost. _PAGEBREAK_ Q: You don’t think that even with an increase in call prices this kind of a reserve price will be bid for? Giri: Increase in call prices is a response that telcos will give in the scenario where number one DoT accepts all these recommendations inspite of the risk of there being no bids. Number two, they conduct the auction and the operators bid and get the spectrum for which they will have to find banks willing to finance them to crazy levels of debt, even after taking into account the deferred payment aspect. Even the deferred payment has to be arranged for upfront, you cannot commit to pay something without having bank financing behind you. If all these improbable links in the chain fall in line then yes, the feat of acquiring spectrum at these astronomical prices can be accomplished. If that all can be done then we can as well visualise call tariffs also going up, but in reality none of these will happen. Q: What is your call on Bharti Airtel as well as Idea? Giri: We are saying that the stock has corrected a little bit to accommodate the possibility that some modified recommendation, having a net negative impact relative to where we were last week, will go through. This is therefore a reasonable enough time to buy. Q: You are referring to Bharti or Idea? Giri: Particularly Bharti. Q: Is that the call on Idea as well? Giri: It is a call. But because there are smaller companies and we are moving into a fixed cost regime for every operator, we need to know the details of what exactly is the final dependency, how much is the reserve price is before we can say definitely about Idea also. Q: You spoke about consolidation briefly, is that something that we can expect in the industry going forward, if in case this comes through in it’s current form and there is extreme stress on balance sheets? Mittal: I would not really call it consolidation because none of the operator would actually benefit from acquiring a small operator. But yes, the artificial competition or the hyper competition that was created that would obviously go away because now you have all the incumbents plus a couple of new operators in terms of say Uninor, which might be willing to actually operate in all the circles. So, yes, the so called competition would go down and obviously the profitability only in terms of realisation should improve. Q: Is there anything in this that may make it positive for 4G guys like Reliance? Giri: For 4G, in Reliance’s perspective, they need the technology to be ready. I think they do not have a customer base or they don’t have spread of towers. If 4G had been auctioned and some of the other operators like Bharti or Vodafone had got off to a quick start then they may have been disadvantaged because they need to range a lot more infrastructure in these other companies need to do. So, a postponement of 700 works to the advantage of Reliance Industries. One can also say that if that had happened, the Bhartis of the world would have had to find money which they anyway would not have found because they need to find quite a lot of it to preserve their existing spectrum. So, 700 also becomes a very theoretical consideration. Q: There was a suggestion from one of the brokerages that Bharti and Idea should bid only for the 1,800 megahertz of spectrum to replace their 900 megahertz spectrum. Does that look like a possibility? Giri: That is a possibility when it involves significantly greater amounts of network reengineering. If the whole country starts reengineering, its network at once then we will go backwards in time as a country. Q: Your base case is that you expect these recommendations are going to be changed, atleast the reserve price has to be. What kind of a reduction do you think is practically and politically possible? Giri: Ultimately, it is anything more than USD 200-300 million per megahertz then it won’t work.