The Cabinet on Wednesday fixed a base price of Rs 3705 crore per Mhz for the 2100 Mhz band for the upcoming spectrum auctions. The Cabinet accepted the Telecom Commission's recommendation to price the 3G spectrum at that price, 36 percent higher than suggested by the Telecom Regulatory Authority of India (Trai).
Naveen Kulkarni, co-head of research at PhillipCapital says the price ofcourse is high, but it is on expected lines.
He does not think Idea Cellular and Vodafone will bid aggressively for the 2100 MhZ band. Bharti will be active in the space, he adds. "Idea has a huge retention bidding coming up in the 900 MhZ band in around nine major circles," he explains.
Besides the 2100 Mhz band, the government will auction 103.75 Mhz of spectrum in the 800 Mhz band, 177.8 Mhz in the 900 Mhz wavelength and 99.2 Mhz of 1,800 Mhz spectrum, in an auction.
He has a buy on Idea Cellular and Bharti Airtel.
Below is the verbatim transcript of Naveen Kulkarni's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Do you think Idea Cellular and Bharti Airtel are going to get another knock today, is it bad news?
A: To some extent it is a very high price that is for sure but this was not something that was not expected. Sometime back Department of Telecommunications (DoT) had clearly said that they are looking at a price close to around Rs 3,900 crore and Telecom Regulatory Authority of India (Trai) has recommended Rs 2720 crore. However, mostly we have seen is that the reserve prices for all the bands have been significantly higher than what Trai had recommended. So, the market was expecting this a bit. So, I don’t think so based on this news alone we should be looking at negative.
Latha: How might it ultimately sell?
A: If I were to look at the 900 MHz - so that is more favourable band both for 3G as well as 2G services because of the wave propagation characteristics. So 900 MHz is for pan-India is around Rs 5,200 crore currently and this is at Rs 3,700 crore. So there will be a mix and match between 2100 MHz and 900 MHz there will be choices that people will make.
Considering the reserve price are Rs 3,700 crore, the biding will not be very aggressive because there will not be so many takers. So it depends on the supply and demand scenario. So for 900 MHz there are 3 to 4 players because Idea has to retain its circle, Vodafone has to retain its circle, Bharti will be aggressive in some of its circles. However, incase of 2100 MHz may be Idea and Vodafone may not participate aggressively.
Sonia: In how many circles does Idea need 3G spectrum currently and how much are you penciling in terms of cost for Idea for the 2100 MHz?
A: Incase of Idea Cellular currently they have 3G spectrum in 11 circles. They will have to buy out in 11 more circles but the point is that I do not think that Idea Cellular will be able to participate for 3G spectrum this time because they have a huge 900 MHz retention auction coming up which is essentially 9 circles. All the 9 circles are their core circles except for lets say Karnataka which is not very big for them.
All the 8 circles are pretty big, they account for almost around 75 percent of the revenues for the company. Retaining those circles will be a huge task. Out of those 8 circles, 2 are a must because they do not have back up spectrum there. So, it is going to be a very tricky auction for Idea Cellular. I do not think so they will be able to participate for 2100 MHz, mostly Bharti will be very active there.
Sonia: So, they may not participate but how are they placed with in terms of cash to bid for these auctions?
A: Every company in telecom will have to borrow. Nobody has got piles of cash reserves. However they have taken approval of around Rs 25,000 crore for their debt ceiling so they can borrow another Rs 10,000-12,000 crore more. Apart from that the government norms are that they have to pay upfront 25 percent, remaining 75 percent can be paid after a moratorium period of two years. So that funding facilities is still available. So, it is not so much from a cash flow perspective but eventually it is the debt either it is government debt or you borrow it from banks anyway it is going to be a debt.
Latha: Is your company recommending a buy on any of these shares?
A: We have a buy on Idea Cellular as well as Bharti, reason being there is still lot of value in both these stocks. This is the biggest auction for Idea Cellular. In this auction, more or less everybody is expecting that Idea will have to spend in the range of Rs 18,000 to 20,000 crore. That much amount they should be able to retain all their circles, but may be not buy additional spectrum for improving their 3G footprint.
However, once we are done with these things, Idea will have more fire power in terms of launching more data products in the market and then this big overhang is done with, the stock should start performing again. Then it goes back again to the core operating performance which has been very strong for Idea Cellular over the last so many years.
Latha: So target price
A: Our target price is Rs 200.
Latha: You have a buy on Bharti? If yes what is the target price there
A: We have a buy on Bharti and the target price is Rs 550.
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