Bharti, Idea good buys; look out for 2G price: IIFL

The telecom space, off late, has been abuzz with a lot of developments. Concerns regarding the 2G spectrum pricing recommended by the government have been overriding the sector for quite some time. The Telecom Commission is now discussing the reserve price for the 2G spectrum.

In an interview with CNBC-TV18, Bhavesh Gandhi of IIFL speaks about the telecom sector and says, "The 1800 MHz pricing appears to be very steep if one goes by TRAI recommendations. We do expect a lot of to and fro between the government and industry and the regulator."
The pricing can severely weaken the position of new operators, believes Gandhi. The eventual pricing for the reserve price of the 2G spectrum would be something to watch out for, adds Gandhi.
On Thursday, Bharti acquired 49% stake in Qualcomm. Gandhi feels that it would help Bharti to spread its 4G footprint to about eight circles, including Mumbai and Delhi. Looking at the stock's bright prospects, he puts a target of Rs 400 on the stock.  
Gandhi also expects more than 10-12% upside from current prices on Reliance Communication. He is also positive about Idea at current prices. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video
Q: What is your thoughts on what Bharti did yesterday with that Qualcomm stake acquisition? It has now got an access to some of the key circles like Delhi and Mumbai, something that it was craving for a while. What would be the impact you think on the eventual revenues? I know initially there won't be anything but what could the eventual monetary gain look like?
A: I think what this deal would do is expand Bharti's 4G footprint to about eight circles and one must recall that Qualcomm circles include Mumbai and Delhi, the two most lucrative circle for any operator. In that regard, the eight circles together account for something like 43% of the industry gross revenues, up from about 23%.
Bharti has expanded its 4G footprint and along with 3G, it now effectively has a presence in 18 circles if you include 4G in 3G spectrum. Q: What would your call on Bharti Airtel be now? Have you up the target price or what is your rating on the stock?
A: No we haven't changed our estimates or target price post yesterday. We retain our buy with a target of Rs 400 on the stock. Q: On this spectrum pricing issue, what are your thoughts because telecom companies have sort of vociferously expressed their displeasure, this entire recommendations do you think that since many of them may not find it viable at all there is a prospect perhaps of the auction not going through well?
A: The 1800 MHz pricing appears to be very steep if one goes by TRAI recommendations. We do expect a lot of to and fro between the government and industry and the regulator.
One needs to watch this space for what would happen especially, with regards to the new operators for whom the business case would severely weaken. We have already seen a lot of news flows on them. So one is to watch out for what would be the eventual pricing for the reserve price of the 2G spectrum will be. Q: According to you which telecom stock at this point in time is more susceptible to the regulatory overhang? If in case the reserve auction price comes in at the DoT recommendation vis-à-vis the TRAI's, which is higher by 17%, which one would possibly be the most affected?
A: I think it could impact the top stocks in varied manner. We believe Bharti has the best balance sheet of all the players. We expect it to be able to digest. It remains to be seen whether they want to have 2G spectrum or not.
In that regard we would feel Bharti and then followed by Idea would be the better bets right now, considering the regulatory overhang that we have in the sector. Q: That’s a relative bet of course. But overall if you had to give us a take on the sector, do you think it's best to avoid the sector at this juncture because of all the regulatory overhangs?

A: I wouldn't say avoid, but then as I said, Bharti at Rs 300 and Idea at Rs 78 or Rs 80 does offer a good upside compared to the market. Overall, I think one can look at these two stocks at current prices.

Q: What is your call on Reliance Communication, that one comes out with numbers as well?

A: For Reliance Communications we do have a hold or a market performer kind of a rating so we would not expect more than 10-12% upside from current prices.