The department of telecommunications’ (DoT) decision to hike annual spectrum fee (as a percentage of adjusted revenue share) by 100-200 basis points is yet another negative event for the sector. While the proposal to hike spectrum fee had been there for a long time now, it was earlier understood to be linked to 3G auctions.
We estimate an effect of 2.5%, 1.2% and 3.5% on the earnings before interest, tax, depreciation and amortization of Bharti Airtel Ltd, Reliance Communications Ltd (RCom) and Idea Cellular Ltd, respectively, and 3.1%, 2.6% and 7.6% on our target prices for these companies. The effect on RCom is lower as GSM and CDMA spectrum is not clubbed in spectrum fee calculations for dual technology operators (spectrum fee hike is more in higher spectrum slabs). Spectrum fees on GSM and CDMA revenue streams is calculated separately. VodaofoneEssar Ltd has written a letter to the government objecting to this because it believes the policy favours dual-tech telecom companies.
As per reports, DoT has internally decided to delay the implementation of mobile number portability (MNP) till July (from March-end previously) as the systems of some telcos are yet to be completely installed and tested. This may provide temporary relief to telcos’ quarterly earnings (we expect some effect on post-paid tariffs post-MNP). Meanwhile, the 3G auction process appears to be on track. Although no applications have been submitted so far, media reports indicate that telcos would submit the applications on the last day.
Uninor, a joint venture between Unitech Ltd and Telenor, is looking to raise long-term debt of Rs9,400 crore, as per reports.
This is in addition to Rs6,100 crore equity infusion by Telenor for funding Uninor’s Rs15,500 crore investment plans. Long-term debt would refinance the Rs5,000 billion bridge loan raised by Uninor from a consortium of Indian banks led by State Bank of India. Uninor has launched operations in eight circles in December.
Despite intense competition, new telcos have been able to tie up significant amount of debt, especially from Indian banks; it is likely that the controlling shareholders’ balance sheet has also been used for raising debt.
We expect earnings to remain subdued in both the first quarter of FY11 (diesel price increase, higher spectrum fee) and the second quarter of FY11 (seasonality). We believe risks to earnings still exist, especially with 3G and MNP round the corner. We expect stocks to remain range-bound. Proper mergers and acquisitions framework is the key to medium term re-rating of wireless stocks.
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