EGoM rule to weigh on telcos; see stocks trading: JM Fin

A high powered ministerial panel headed by Finance Minister P Chidambaram on Monday gave its approval to a proposal for charging a one-time fee for existing 2G airwaves from mobile phone carriers. The price for the fee will be later determined in an upcoming auction.

After this news trickled out, telecom stocks looked excited on Monday. However, on Tuesday Bharti Airtel was down and Sanjay Chawla, Telecom Analyst of JM Financial sees a negative impact of Rs 10-11 per share on Bharti post the EGoM proposal. He also feels Idea's shares will see a downside of Rs 5-6 per share. Also read: EGoM has tentatively resolved issues on one-time fee: Sibal
Chawla further added that the market is still not aware of the payment to be made by CDMA players. According to him, payment by CDMA players will be a negative surprise and if it goes ahead, Reliance Communication may have to make a one-time payment of Rs 3,500 crore. He believes the decision will only add to the burdens of a sector that is already reeling under a lot of debt and excess competition.
In the near term, telecom stocks will remain in a trading range, opined Chawla. He also thinks the list of interested 2G players will be released by the end of October. Here is the edited transcript of the interview on CNBC-TV18. Q: What was your key takeaway after reading the EGoM recommendations yesterday?
A: Obviously the EGoM decision is not a positive one for telecom stocks. We are looking at Rs 10-11 per share downside for Bharti on the back of this decision and Rs 5-6 per share downside for Idea. It is not a positive decision.
Ofcourse the details that came out yesterday were a bit patchy and most of the analysis that we have done are based on some sound bytes which were shared by the ministers. There should have been a proper press release but that was not the case.
What we also hear is that there will be some financial burden or one time fee for CDMA operators as well as for their spectrum holdings above 2.5 megahertz (MHz). It means companies like RCOM will also have to pay around Rs 3,500 crore and Tata may have to pay around Rs 3,000 crore. To that extent, there is some levelling of the playing field but, still it is a burden on a sector which is already reeling under a lot of debt and excess competition. Q: Did you take the fact that payments would have to be made above 4.4 MHz as a fresh negative because some people had factored in 6.2 in their calculations or was it along expected lines?
A: Broadly what has been talked about over the last two-three years by Telecom Regulatory Authority of India (TRAI) is that a contracted amount of spectrum under the license is 6.2. And I do not think anybody was building in 4.4 being used as a cut off for the GSM operators. So it is a slightly negative surprise. For example: we were not expecting more than Rs 2,000 crore of Bharti, based on 6.2 cut off and prospective payment. Whereas now we are looking at around Rs 4,200 crore for Bharti and around Rs 2,000 crore for Idea, which is slightly negative versus our expectations.
_PAGEBREAK_ Q: Do you see this cut off being challenged legally by the telecom companies? Or it is safe to assume for the sake of calculations that it will be 4.4 and Bharti will have to cough up the amount that you are talking about?
A: We have not heard from the operators as yet. As I said one of the redeeming features seems to be that even CDMA operators will have to pay. So there is some leveling of the play field. If the one time fee had been charged only on the GSM operators, obviously there was very strong ground to litigate. But now we will have to wait and see.
There are still fundamental problems in trying to charge one-time fee. We do not agree with the fact that whenever there is a new entrant coming into the industry and paying a higher price for spectrum, we need to start charging incumbents. Fundamentally, this approach to leveling the play field is fraud in our view.
Secondly, what is the sanctity of 2.5 MHz or 4.4 or 6.2 cut offs? It is not that the spectrum above 4.4, that these telecom operators have been holding has come free. They were paying a higher revenue share in lieu of the extra spectrum. But the most important issue we believe, which is still a pending issue, is how to deal with the start-up spectrum given to the dual technology operators. GSM spectrum was allocated at the end of 2007 and we have seen all the licenses, which were given in 2008 January, were cancelled by the Supreme Court.
So, that is still an anomaly in the sector. And I think that still remains a fundamental source of problem with regards to the level-playing field in the telecom sector. Q: This Rs 3,500 crore, one time payment, that you are talking about for RComm has that surprised you? Would that come as a fresh development for most investors?
A: That is absolutely correct because nobody was expecting CDMA operators to be charged for their basic spectrum. We will have to wait and see in the next week what is the final decision of the cabinet on this issue. They might do some tweaking here. The other thing is perhaps the payment would be made in a staggered way. Now this would be positive, unless the government wants to reserve the NPV of the payments and wants to charge an interest on it. But compared to what we were expecting a few days ago this development has come as a negative surprise as far as RComm and Tata are concerned.
_PAGEBREAK_ Q: Where does all this leave Idea Cellular? That stock reacted very positively yesterday and is down 4% this morning perhaps a closer look at the fine print?
A: This issue obviously we will get to see some final decision from cabinet next week. Then we will see whether operators want to challenge it legally. Although we do believe there are grounds of legal challenging this sort of approach to level the playfield. But there is still uncertainty on this issue.
Secondly, this is being linked to an auction discovered price. So, there is this added uncertainty as to what happens to the final auction discovered price. These numbers are still not going to be crystallised unless we are through with the auctions.
Overall, we believe that the stocks are going to be in a trading range in the near-term. Sooner or later this issue of reforming will also be talked about in the cabinet and EGoM will take it up. On the earning side as far as Bharti is concerned, unless Africa surprises positively we could see some more earnings cut on the back of Q2 results. Mobile revenues are going to drop across the board this quarter. Earnings are not going to be supportive. So near-term we expect the stocks to be in a trading range. Q: Last quarter too there was some disappointment with the Bharti earnings. Do you expect the same in the current quarter? Do you expect that to be reflected in other telecom stocks too?
A: I think it is probably a foregone conclusion that mobile revenues will drop this quarter. It is a seasonally weak quarter. The seasonality keeps on becoming more pronounced every year. The rural business continues to increase a percentage of overall business and that shrinks in the second quarter. So that is pretty well understood.

But, in the last quarter, the big disappointment was on the margin side. Bharti's margins fell by over 300 bps. That is not going to be repeated in this quarter. Africa should also start stabilizing. So we will not see that sort of a disappointment. We could still see some further 3-4 percent cut in the EBITDA level for Bharti and also for Idea. Q: There was some pressure off late in Bharti on expectations that Reliance might take a very aggressive stance in the auctions which are coming up. Is it still in the realm of speculation? Or have you got some sense of how aggressive Reliance could be, which might have ramifications for the incipience in this space.
A: Obviously it is largely speculative even now. Unless we see the list of interest rate companies in the auction. We believe that it does not make sense for RIL to participate in the 2G auction. It maybe a cheaper alternative but they may still go ahead and bid in some circles. I do not see a very large scale across the board pan, India bidding on the part of RIL.