Indian Telecom - Motilal Oswal

INDIAN TELCOM: TRAI recommends auction of 2G spectrum potentially available post license cancellation of new entrants; Renewal liability significant if committee valuation used

TRAI has recommended cancellation of 43 licenses and legal examination of the feasibility of canceling 31 more licenses on a pan-India basis.

The committee report has valued pan-India contracted spectrum (up to 6.2MHz) at Rs17.7b/MHz for a 20-year period and incremental 1,800 MHz spectrum (beyond 6.2MHz) at Rs45.7b/MHz for a 20-year period as compared to all India winning price of Rs33.5b/MHz for 20 years.

While overall per MHz valuation made by the committee is higher than 3G spectrum winning price, the valuation for key metros and larger circles is lower than 3G

Assuming that excess spectrum (beyond 6.2MHz) is valued at the price indicated by the committee, Bharti would have a liability of Rs10/sh for current license period (which ends between 2014 and 2024 for various circles), and Rs25/sh at the time of license renewal (period of 10 years).

Similarly, Idea would have a liability of Rs4/sh for current license period (which ends between 2015 and 2028 for various circles) and Rs24/sh at time of license renewal (period of 10 years).

We believe that a market mechanism (auction of surplus 2G spectrum) might lead to price discovery lower than valuation based on 3G price/committee report. We expect consolidated EBITDA CAGR of 21% for Bharti and 29% for Idea over FY11E-13E. Maintain Buy on Bharti (trades at proportionate EV/EBITDA of 7.1x FY12E and 5.7x FY13E) and Idea (trades at EV/EBITDA of 6.8x FY12E and 5x FY13E).

Source : Equity Bulls

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