GSM auction may see govt collecting Rs 7k cr: JM Financial

After the collapse of the CDMA auction, government hopes to make up for the loss by levying a one time charge on incumbent GSM operator’s spectrum beyond 4.4 MHz.

Sanjay Chawla, JM Financial spoke to CNBC-TV18 about the prospects from the GSM auction and how government may be able to collect Rs 6000-7000 crore from the GSM 1800 auction in FY13. "The demand is less than supply and there is some spectrum which is felt unsold. That is going to be a big question in the coming days" he added.

Below is an edited transcript of Sanjay Chawla’s interview on CNBC-TV18.

Q: Your view on the upcoming GSM auction? After the CDMA auctions being such a wash out how do you see the GSM auction panning out?
A: Obviously CDMA auction was washed out, so government will be able to conduct the GSM auction only for 1800 megahertz (MH) band. If you look at the earnest money that has been deposited, our inference is barring the top seven circles which are Mumbai, Delhi and the five Category A circles. Barring those seven circles, government will be able to sell at least eight blocks which are on offer. So the demand is sufficient in the remaining circles.
But in the top seven circles the demand is less than supply and therefore one should expect that the government will not sell the entire spectrum in those seven circles and these circles comprise nearly 80 percent of the reserve price. So the question that would arise, how should one interpret such an auction result where the auction in a particular circle is ending at the reserve price only? The demand is less than supply and there is some spectrum which is felt unsold. That is going to be a big question in the coming days.
In terms of total amount, government may be able to collect Rs 20,000 crore at the reserve price but remember that only one third of that is payable in the first year. So around Rs 6000-7000 crore, government may be able to collect from the GSM 1800 auction in FY13.

Q: So how do you see the individual strategies for Bharti and Idea based on the earnest money that they have deposited for the auction? What will be their strategy and what are they likely to bid for? What will it do to their balance sheets?
A: Idea has to participate because seven of its licenses stand to be quashed as per the Supreme Court verdict. But looking at the earnest money that idea has deposited, clearly they are interested in biding for a lot more spectrum than what is implied by those seven circles. So as far as those circles are concerned Idea could end up paying Rs 2000 crore as the reserve price to get the spectrum to continue operations. But in the other circles it all depends on how high the biding goes. So the estimate could vary between Rs 1000-2000 crore for Idea.
The total tab for Idea could be Rs 3000-4000 crore in the auction and only one third is payable in the first year. So that should not stress their balance sheet. If you look at all the major operators, Idea’s balance sheet and the leverage ratios are best in class. Their net debt to EBITDA ratio is 2.1-2.2 whereas for a player like Bharti the net debt to EBITDA ratio is around 2.7. So, Idea has a very strong balance sheet and paying Rs 1000-1500 crore in first year is not going to be a big stress for them.
As far as Bharti is concerned, they seem to be interested in acquiring some spectrum, 1-2 blocks may be primarily in B and C category circles where the reserve price is fairly low. Although auction may be a bit intense but we don’t expect the bill to be significant. A company like Bharti which is generating Rs 3000-4000 crore of free cash flow every year, will not cause any strain to the balance sheet.

Q: Wanted to focus on a small point with regards to Bharti? It’s quite crucial for Bharti but what is your sense with regards to the Bharti Infratel IPO? Do you think that could happen this fiscal?
A: Our sense is that Bharti is quite keen to complete the IPO within this fiscal year. If they get the approval and everything goes fine, they may do it in December itself. But we will have to wait and see. It’s hard to put a price on the IPO right now. But, there is some potential for value unlocking for Bharti Airtel shareholders, maybe Rs 10-20 per share of value could be added to Bharti Airtel once Infratel IPO happens but that’s just about it. It’s not going to be a big mover for Bharti Airtel stock.

Q: Also wanted to focus on one time fee with regards to excess spectrum. What do you think would be the exact impact on the operators?
A: It’s hard to crystallise the EPS impact when there are so many uncertainties. For one, the CDMA auction is not happening; so as far as one time fee for some CDMA operators like Tata and R-Com is concerned, we don’t know how much they will end up paying. Government is going to look at this issue maybe sometimes early next year so that’s an uncertainty for those operators.
As far as the GSM operators are concerned the estimate is around Rs 20000-21000 crore from GSM operators. Another Rs 3000-4000 crore, if you consider the retrospective impact of the one time fee. So, in total the government can expect to collect around Rs 25000-26000 crore.
A lot will depend on how the payment is going to be formulated, whether it will be staggered or will be paid upfront. So, a lot will depend on it, but remember that the bulk of Rs 25000-26000 crore payment, the estimate of one time fee will be charged to BSNL and MTNL at almost half of it, at Rs 12000-13000 crore. So, that’s not going to accrue to the government on a net basis. It’s paying from one and government will eventually help them out or bail them, so it’s basically put in money from one pocket to another from the government point of view.
As far as Bharti, Idea and Vodafone are concerned the estimate is unchanged. For Bharti the liability is going to be around between Rs 4000-4500 crore, for Idea it will be around Rs 2000 crore and for Vodafone around Rs 2500 crore. So, the impact could be around Rs 10-11 per share for Bharti and Rs 5-6 per share in the case of Idea.