India's telecom spectrum auction closed Thursday with the government raising about Rs 65,700 crore. Naveen Kulkarni of PhillipCapital. He said that the brokerage has a buy call on both Bharti Airtel and Idea Cellular. While Idea's financial performance may take a beating, its operational performance will pick up going ahead, he added.
Telcos spent more on the spectrum auction than was expected and most telcos added capacity in a bid to provide better services, said Naveen Kulkarni of PhillipCapital. He added that the brokerage has a buy call on both Bharti Airtel and Idea Cellular.
Kulkarni added that while Idea's financial performance may take a beating, its operational performance will pick up going ahead.
Below is the transcript of Naveen Kulkarni’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.
Anuj: What is the final outcome? Who gains? Who loses? And do you think the stocks have adequately priced in the kind of damage in terms of the stretching of balance sheets and are they ready to move on from here?
A: The amount that telecom operators have spent is definitely higher than what we have been expecting. So not necessarily I would say that market has completely factored into the extent that operators have spent. So, Bharti Airtel has spent Rs 14,200 crore odd. This was not expected and they have added a lot of capacity spectrum when already they have had a lot of capacity in the 4G domain. Similarly, Jio with just recently having launched services, they have also added capacity spectrum in the 2300MHz band. So most of the operators have added capacity ahead of the market. So, from that perspective, this was not very much expected, but essentially, what all the operators are trying to do is they are trying to beef up their resources so that they are able to provide better quality services to retain their customers. So, that is the primary strategy for the incumbents to retain their premium customers who contribute more than 50 percent of the earnings before interest, taxes, depreciation and amortisation (EBITDA).
Latha: So, are you getting a sense that everybody has equipped themselves for the rate cut war and do you have any buys in this space?
A: We have buys in the space on both Bharti Airtel and Idea Cellular. So, our sense is there is a lot of value in this two stocks. But, rate cut is more to do with the market forces, but spectrum essentially provides you with the quality of service that you want to provide to the customers and that is where the primary strategy has been to provide better quality of services to the customers so that they do not move out of your network.
Anuj: In listed stocks, how would you approach an Idea which clearly has been the worst performing stock?
A: Idea, a lot has been factored into the price. The stock is trading very close to the book value. But the financial performance is going to take a beating for some time now. They will be able to protect their market share with the amount of spectrum that they have bought, the often criticism with Idea Cellular was they do not have adequate spectrum. So, they have addressed that issue. The financial performance will take its time to revive, but operating performance should start improving. There could be some bit of downside from here, but I would say that from the perspective of the history of the company, they have been able to outperform the market. That can still continue from here.
Latha: So, price targets on both?
A: After this auction, we have not factored in the impact of the amount of debt which had come in. So, we will be looking at relooking into our price targets.
Latha: Both, Bharti and Idea?
A: Yes, both the companies.
Latha: Just a thought. Did it look like Idea and Vodafone were bidding in such a way as not to overlap, there is always a buzz that the two could join hands sometime.
A: They might do a spectrum sharing arrangement for now because that has been on cards for a while. And there is a global precedence for number two and number three operator joining hands. So, we will have to wait and watch how that pans out. But if you look at the amount of spectrum that Vodafone has bought in this auction, they have covered their 4G footprint as well as 3G footprint in a very meaningful manner. So, whether from here on, they need to pool in resources in the immediate future remains a big question mark.