Hope Cabinet lowers price to Trai recommended level: EY

Prashant Singhal of EY fails to understand why the DoT committee has finalised reserve price higher than the one recommended by Trai. This move will only increase the pressure on telcos, he says. He hopes that the Cabinet will lower the reserve price to Trai recommendation when it goes to them for clearance.

However, he does not think the entry of Reliance Jio will necessarily be a bad thing. He believes the opportunities are immense in the sector. With smartphone penetration just in double digits, there’s still a long way to go. Singhal says with 3-4 players, there will be an explosion of data, rather than nit being a deterent. He adds that tariffs are bound to move northwards from here on the back of increased spectrum prices.

Rajan Mathews, director-general of the Cellular Operators Association Of India (COAI) too agrees with Singhal that Reliance Jio’s entry won’t adversely impact the existing players and that it is being overplayed.

Mathews is worried about the quantum of spectrum available as a demand-supply mismatch can push prices higher (artificial inflation). He further adds that the defence department has cleared 2100 MHz spectrum for commercial use. He is unsure what is holding it up as DoT too has given a go ahead. However, he believes that the 2100 MHz band might be put up for auction.

Naveen Kulkarni, co-head, research of Phillip Capital says the amount of spectrum available in the 900 MHz band is limited. He believes that Reliace Jio will be interested in the 800 MHz, which could be another concern for the market. He has a buy on Bharti Airtel and Idea.

Below is the verbatim transcript of Rajan Mathews, Prashant Singhal and Naveen Kulkarni's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: How are you looking at the reserve price itself, any comments that the base price is 17 percent higher than what the Telecom Regulatory Authority of India (TRAI) recommended, is it an incremental negative?

Singhal: The reserve price is a price at which you need to start the bidding. I don’t understand why should that be higher than what TRAI had recommended or the cleared price of the February 2014 auctions or it should have been the reserve price of the February 2014 auctions and let the market based on the demand supply of the spectrum decide what the clearance price is. This is purely reserve price and by upping the reserve price it just puts more pressure on the operators.

One way to look at it is it gets only serious players to bid but the industry is now matured enough to only attract the serious players to bid; emotional bidding is virtually out from the industry. So, I would say that it is higher and I hope the government when it goes for the cabinet approval they try to bring it back to the TRAI recommended reserve price or the reserve price which was there in the February 2014 auctions.

Sonia: We don’t have any details on the important 900 MHz and 1800 MHz spectrum reserve price but there are reports indicating that the Department of Telecommunications (DoT) wanted a 15-25 percent hike in that reserve price. If that actually comes through then what could the implications be?

Mathews: Certainly the reserve price of 900 MHz and 1800 MHz are important to TRAI as it has given its initial recommendations, the issue becomes one of spectrum quantum. The reserve price will determine the vigour of the bidding and the number of players that will want to bid. However, our bigger concern at this particular point is the quantum of spectrum because if that is not available then we will have artificially high prices being bid for the existing 900 MHz and 1800 MHz that is being put up.

Latha: Have you any indication from the government that they are actively looking at speaking with defence or taking other steps to increase the quantum?

Mathews: As we understand right now the defence department has very earlier on cleared the 2100 spectrum for commercial use. There had been tests that were done by the National Security Council to provide that spectrum in case the defence needed it. Also, what has happened is that the DoT had cleared it when Chandrashekhar was the DoT secretary. So, we don’t understand what is holding it up at this point?

Sonia: Any update on whether the 2100 MHz will be auctioned or not?

Mathews: Latest understanding is that both defence and the DoT have agreed that the spectrum in the 2100 band which is presently lying unutilised and unused will be put up. So, we are waiting to get official conformation of that.

Latha: Over the past couple of weeks Bharti Airtel and Idea Cellular are both down about 12-15 percent, what is bugging them? Is it that this auction could be fierce, the one that comes up in February or is it greater competition when Reliance Jio enters?

Kulkarni: There are a couple of factors which are impacting telecom stock prices. Auction is a big concern; last year also we saw that before the auctions there was quite a bit of correction for both Bharti as well as Idea. Post Q2 results Bharti had rallied quite a bit and prior to auctions there was significant correction and when Jio put in less money for 1800 MHz spectrum then there was further correction.

So, this time also there is uncertainty with regards to what could be the final outcome of the auction. The amount of spectrum which as of now seems to be pretty limited especially in the 900 MHz, so, pan India if you see most of the circles have just around two blocks of contiguous spectrum available which is not sufficient considering the demand will significantly exceed the supply; demand could be for four blocks across India. So, the auction prices are likely to move up much faster than what people were anticipating.

Secondly, also important will be how much 800 MHz comes up for auction. So, that could be one band which Jio might be very keenly interested. So, if Jio is able to secure 800 MHz then they have very good spectrum in place to launch a good voice product. So, that could also be another concern for the market. So, these are the two primary concerns which I see as of now.

Sonia: The entry of Rel Jio has clearly shaken up the incumbents so how aggressive do you think the landscape could become with Rel Jio in the fray now, in the sense how much could tariffs and margins come under pressure over the next couple of years?

Singhal: I would say that today we are virtually the lowest when it comes to realisation per minute, when it comes to realisation per MB. If you look at the data revenues for the industry as a whole we are just about 14-15 percent.

The smartphone penetration in India is just about mid-double digits, in teens. The opportunity in this market is immense and the tariffs would move northwards even with the entry of Reliance Jio because there are no business cases anymore to support such tariffs with the high input costs which are going to come as a result of increased spectrum prices. I think the entire content and data which is just about taking off that is what is going to drive the market growth. With three or four players including Reliance Jio participating in it, it will fuel the explosion of data rather than be deterrent for the operators and we will see much greater innovation which would happen.

So, if I were to just compare India with a market like Turkey which is very small as compared to India, the data revenues over there are almost 35-36 percent of the overall revenues. There are Machine to Machine (M2M) applications which are immense; there are operators who have gone an innovated on applications, so, we will see a lot of innovation in the market which will drive the growth and hence the overall pie for the market will go up with Jio coming in.

Latha: Will Rel Jio be a disruptive factor or would you think that there would be initial teething problems and therefore the disruption if any is postponed to 2016 or would you go even with what Prashant is saying?

Mathews: I think the fact that the members are spooked or that the market is going to get roiled by Reliance Industries' (RIL) entry is a bit overplayed. I think they will be a vibrant competitor, I think the industry is ready for that and they will be disciplined competitor because the stakes are high, the prices that we paid for spectrum are high, the investments that we had to make in our infrastructure and networks are high. So, we will expect to see very vibrant competition.

I believe in the end it will be good for the consumer. I think the consumer can expect to continue to receive good value for their money especially as we enter into the data phase of our offerings.

Sonia: In terms of stock prices what is your recommendation on Bharti and on Idea?

Kulkarni: We have a buy recommendation on both Bharti as well as Idea. Our target price for Bharti is Rs 515 which is a significant upside from current levels.

Idea, we have a target price of Rs 200 which is more than 30 percent upside from current levels.