Telecom: Sector update - Excess spectrum charges to be prospective - BRICS

The Empowered Group of Ministers (EGoM) has tentatively resolved the issue of one-time excess spectrum charges. The final decision on this issue will be taken in a cabinet meeting on October 16, 2012. The following are the key decisions taken by the EGoM:

- All spectrum over 4.4MHz for GSM operators and over 2.5Mhz for CDMA operators will be considered as excess spectrum

- The price for the excess spectrum will be based on the prices decided in the upcoming 2G auctions

- Excess spectrum will be charged on a prospective basis.

Our calculations - using the EGoM's latest decisions and earlier expectations built from the recommendations of the Attorney General (AG) - show that the impact remains unchanged for Bharti, but will amount to Rs16.4bn for Idea, as against the earlier expectation of Rs14.1bn.

Bharti's payout to be Rs41bn and Idea's to be Rs20bn: Using the spectrum auction reserve pricing as the base price for calculating the excess spectrum charges, we estimate Bharti's payout based on the EGoM's decision to be Rs41bn (Exhibit 1), while Idea's payout will be Rs19.6bn (Exhibit 2). Apart from this, the EGOM has also decided to refund the companies whose licences had been cancelled by the Supreme Court. This should result in a refund of Rs3.26bn for Idea's licenses cancelled in seven circles, leading to a net impact of Rs16.4bn. However, Idea will have to rebid for spectrum in those circles in the upcoming auctions.

Payout expectation unchanged for Bharti and up by Rs2.3bn for Idea: Based on the AG's recommendations, we had earlier expected that the excess spectrum of over 6.2MHz for GSM operators and 5Mhz for CDMA operators would be charged "retrospectively" from July 2008. Had the EGoM accepted the AG's recommendation, then this payout would have amounted to Rs41bn for Bharti and Rs14.1bn for Idea.

Regulatory clarity emerging, but at a significant cost: The declaration of spectrum auction, reserve price and clarity on excess spectrum is providing better visibility on the major regulatory issues pertaining to the sector. A few major issues that still remain unaddressed are regarding spectrum refarming in 800/900MHz band and 3G roaming arrangements. However, the resolution of each regulatory issue is leading to higher funding needs for telecom operators at a time when their balance sheets are already stretched.

Valuation and Outlook: We maintain a negative outlook on telecom stocks, due to their stretched balance sheets, high regulatory costs and inability of operators to raise tariffs. Bharti trades at 7x FY13 EV/EBITDA and 25x P/E; we maintain Reduce with a target price of Rs270. Idea trades at 6.8x FY13 EV/EBITDA and 27.7x P/E; we maintain Add with a target price of Rs84.

Source : Equity Bulls

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