Telecom - No respite on policy front - ICICI Securities

Reason for report: Sector update

The Union Cabinet has set the reserve price for auction of 2G telecom spectrum at Rs140bn for 5MHz for pan-India license. This price is around 22% lower than the Rs181bn recommended by the Telecom Regulatory Authority of India (TRAI). Despite the reduction, the reserve price remains a negative for the sector along with the decision not to reduce spectrum usage charges, which has been kept unchanged at 3-8% as against 1% recommended by TRAI. At the revised reserve price of Rs140bn, Bharti Airtel (BAL) and Idea Cellular (Idea) need to increase tariffs by 14-16 paise to maintain profitability. While a high reserve price is likely to challenge new players' decision to stay in the game, it will be critical to see if incumbents behave rationally and not bid at all. We see bidding intensity to be low at these prices and expect Uninor and Siestema's participation in the auction to be limited to only a few circles. Decisions regarding one-time excess spectrum fee and modalities of spectrum refarming are yet to be made, which in our view will add to the overhang on the sector. We maintain our cautious stance on Indian telcos and prefer BAL over Idea.

BAL - sound balance sheet and diversification to limit downside: We expect regulatory impact on BAL to rise owing to status quo in spectrum usage charges, as BAL currently pays around 5.6% as spectrum usage charges. While BAL will witness strain on its cash flow given that seven of its circles are coming up for renewal by FY16, we expect the impact of it to be limited for BAL owing to its high cash flow generation, strong balance sheet, and presence in Africa. We believe refarming of 900MHz spectrum to be the key risk for BAL.

Idea - worst impacted due to pure play in Indian telecom space: We maintain our negative view on Idea and expect the stock to underperform the sector given the high sensitivity to regulatory outcomes. We expect Idea to bid for cancelled licenses, and even at the reserve price the outgo will be Rs17bn, which will further stretch its balance sheet. In addition, Idea will face high renewal charges, as nine licenses are coming up for renewal by FY16. Our regulatory risk for valuation of Idea gets increased to Rs51/share from Rs43/share.

New players will be selective in bidding: We expect high reserve price to limit the participation of new players like Uninor and Siestema to few circles. Uninor has already announced its intention to focus on nine circles for which it will need to pay Rs72.7bn for spectrum as per the reserve price. On the other hand, the impact on Siestema will be higher, as reserve price for CDMA is 1.3x higher than that for GSM.

Source : Equity Bulls

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