Govt reaction to spectrum sale positive: UBS

A: The big picture is Indian mobile operators are extremely spectrum starved and it is very positive to see the TRAI chairman take a stance that this shortage needs to be addressed. It is even more important because data consumption in India is growing very significantly.

Given that digital India is a priority for our Prime Minister, I do believe that more spectrum will come to the market and therefore more spectrum being auctioned I would think is a positive. While it is a positive I think it is almost a necessity. If India were to sustain this data growth which I think it should sustain because it will aid in economic growth, I do think that more spectrum is definitely the need of the hour.

It is good to see the TRAI chairman take a very strong stance and good to see the government respond by saying by May they would auction a lot more spectrum. So, it should overall be positive because spectrum is a raw material for all the mobile operators and there is an extreme shortage of spectrum today in the country.

Reema: In the February auction of this year the aggressive bidding by most of the operators took the street by surprise in fact for Idea Cellular the total outlay was nearly 85 percent higher compared to what they had bid in the previous auction. What is UBS expectations of how much Bharti Airtel as well as Idea will spend in the February auctions; have you done some numbers?

A: Let me give you a little bit of our thought process. If you are an operator in an existing circle, let us say Idea in Maharashtra where they are 900 MHz. For them they already have a big revenue base sitting there. They have to get the 900 MHz back. So, it is pretty clear, it is a do or die and they have to bid and get it.

If you look at India today, for 1800 MHz spectrum we know the mark-to-market price for every single service area; for 900 MHz we only for the metros Mumbai, Delhi and Kolkata. So, what we have assumed is for all the other service areas excluding these three 900 MHz would roughly go at two time the 1800 MHz price because roughly that is where the benefits and cost kind of match because you can run a network on 1800 MHz as well. It is just that it is more capex intensive. So, at some price the 900 MHz and 1800 MHz stack to equalise.

So, our assumption for both Bharti and Idea is that they will pay up to 2x what they paid for 1800 MHz in terms of their outlay for the upcoming February spectrum auctions in 900 MHz.

Reema: Overall for each operator how much are you penciling in?

A: It is part of our cash flow so I am not able to talk about it specifically. However, if you are an operator and you are getting 20 years spectrum you can bid for it. Ultimately if the operators end up bidding a little higher then it will be passed on to the consumers because this spectrum is now locked up for the next 20 years. It is a balance between what the consumer pays, how much the government gets and what the operator pays.

So, as we have seen in the past several years the top three operators have strengthened their position. In 2007 they had 58 percent of the market, now they have 72 percent of the market. So, clearly the market has kind of consolidated in the minds of the consumer and therefore the spectrum cost is not something we should be worried about. It is availability of spectrum per se.

Sumaira: What is your preference, do you continue to favour Bharti over Idea?

A: We like both Bharti and Idea and we like them because it is very simple. First of all we think data growth is a margin additive phenomenon because incremental margins are probably 50 percent above. Two, we think that regulatory things are getting better. As I mentioned the TRAI Chairman is definitely trying to think about the long-term benefits of the industry. Three, pricing power; I think pricing has moved up and we don’t see why it will continue to not inch up further because operators are cutting back on promotions.

Between the two, we have a marginal preference for Bharti simply because the stock is under owned. If you look at the foreign shareholding of Bharti versus Idea, Bharti is definitely under owned versus Idea. To that extent we think Bharti could benefit.

Reema: What happens to the Idea stock price from hereon? It has been a big underperformer, it has only rallied 2 percent in 2014 versus Bharti which is up 20-25 percent. Do you expect Idea to continue to underperform Bharti as well as the market at least till we get more clarity on what they do in the auctions?

A: In our discussions with investors some section of investors are worried about Idea’s 900 MHz spectrum outgo. Frankly, speaking we are not worried. We continue to be positive on Idea because we think the company’s leverage is not much. It belongs to the Aditya Birla Group so I don’t think raising money is going to be a problem.

The company has demonstrated very strong track record in terms of improving its revenue market share. So, we continue to stay positive. The reason the stock has probably been an underperformer is because of these concerns. However, that is an event which will pass of in February. So, post that probably we should see some good performance from Idea.