The TRAI rule requiring telecom operators to pay one rupee for every dropped is good in theory, but hard to implement because of practical issues, says Suresh Mahadevan, MD and Head of Asia Telecom & Media Research at UBS AG.He is keeping his estimates for telecom companies Bharti Airtel and Idea unchanged. In an interview with CNBC-TV18, Mahadevan says that in the top 15 cities, there is genuine shortage of spectrum during peak hours. Also, for call drops when the call is made between two different operators, there will always be a dispute as to which operator was to blame. Mahadevan feels telecom operators are likely to contest the TRAI ruling.He does not see mobile operators having to raise tariffs to compensate for dropped calls.He sees explosive growth in data usage due to increased penetration of smart phones over the next 4-5 years. He expects 60-70 percent of mobile phone users to be on smart phone over the next five years.He is bullish on both Bharti Airtel and Idea, but says he is marginally more positive on Bharti for three reasons.Bharti will be a big beneficiary of the boom in data usage. Also, it is likely to sell its Africa operations completely over the next 12-18 months. This will improve consolidated operating performance as well as help reduce debt on its books. Also, given the huge spectrum bank that the company has, it will be able to give a better experience to its customers, says Mahadevan. Below is the verbatim transcript of Suresh Mahadevan's interview with Latha Venkatesh & Sonia Shenoy.
Sonia: Your thoughts on how much this could impact the listed players like Idea Cellular, Bharti Airtel etc?
A: It is going to be a bit tough to enforce this for a couple of reasons. First of all in urban areas, the top 15 cities, during peak periods there is genuinely a spectrum shortage, which the government needs to address that and that is one number. The second thing is for calls that are kind of disconnected midway especially if it involves two operators; it is always a little controversial whose network was failed.
However, my sense is that it is a good idea and theory but it is going to be quite difficult to implement in practice that is number one. The second thing is I don’t think the mobile operators are going to take this very easily. They can probably voice their concerns to Telecom Regulatory Authority of India (TRAI) or potentially Telecom Disputes Settlement and Appellate Tribunal (TDSAT), while it is a good idea from the regulator to protect the consumer. However, given the spectrum constraints and given there are too many operators, I do believe it is going to be a little difficult to implement.
Latha: At the moment you will not be changing your earning per share (EPS) or profit or revenue projections to subtract any penalties?
A: Certainly not. I don’t think at this point we are clear how this is going to be implemented. We ran some simple numbers, as I said the spectrum constraint is primarily in the big cities, the top 15 cities or 20 cities, during peak period, so from an impact perspective it is not going to be very material, even it were to be implemented. However, having said that as I go back to the earlier thing - a) operators need not agree to this b) there is potentially some practical difficulty for TRAI in terms of enforcing this._PAGEBREAK_
Sonia: Hypothetically, if this is enforced in its entirety then will the telcos be able to raise tariffs. The competition has been heightened with the Reliance Jio launch; telcos will be unable to raise tariffs now?
A: Let us look at it in two–three ways. Rarly Reliance Jio has been threatening to launch for the last three odd years. Now finally they will end up launching, may be a soft launch in December and a real launch in March or something.
However, let's look at two-three things. First of all the voice business is like a cash cow. I don’t think it requires a lot of investments and I don’t think the voice minutes are going to go down. That will continue to be a cash cow. Second, on data we have seen some explosive growth, not in terms of just usage per subscriber but also new users coming into the system. As of now I think the smart phone penetration in India stands at like kind of mid-teens and my sense is we will get to a 60-70 percent kind of penetration over the next probably five–six years and that definitely means there is tremendous amount of growth that is going to come on both the data usage as well as on data revenues because even if you assume realisations were to fall, let's say for argument sake 10 percent every year, even then we estimate that data revenues could go up 9x to 10x in the next 10 years. So, that does provide a very big opportunity for the established players which are Bharti Airtel, Vodafone, Idea Cellular.
I do think that you may not need to raise tariffs on data, in fact you may want to cut tariffs judiciously because it will simulate a lot of usage, not only that but as more people come into the data world, the existing users will also tend to use their phones a lot more. This is even more pronounced given we don’t have very good fixed broadband especially outside the top five-six cities the fixed broadband is really poor. So, the mobile data has a huge opportunity which would mean that operators just need to invest and reap the rewards as opposed to thinking of raising tariffs.
Latha: Therefore what is your order of stock preference?
A: We are quite positive on the mobile telecom operators both Bharti Airtel and Idea. We also like Bharti Infratel but the bigger buy here is Bharti Airtel because we think there are three reasons you need to buy – 1) the data boom we talked about (2) the divestment. I do think that they will end up divesting part of Africa later this year end, potentially the whole of Africa over the next 12-18 months and 3) de-leveraging, which will happen as a result of partly divestment, partly the free cash flow generation because most of the spectrum is now kind of tied in and Bharti has 17 percent of the spectrum that has been allocated nationally and with potentially some spectrum trading, they could get that number higher. I do believe Bharti Airtel currently looks very compelling from a risk reward perspective.
Sonia: What kind of target price do you have on the stock and how are you approaching Idea now?
A: We like both Bharti and Idea, no doubts about that. The only reason I like Bharti a little more is because the catalyst are more particularly the divestment as well as the spectrum bang because I do believe in a data world, the quantity of spectrum you have directly correlates to a much superior customer experience.
Therefore, Bharti seems to be quite well positioned. Idea is well positioned in their stronger circles and Idea has been an execution machine. I think this is a company which has done an outstanding job in terms of improving their revenue market share. However, there is marginal preference for Bharti Airtel though we like Idea as well.
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