India’s top telecom operators using the GSM (global system for mobile communications) technology have grown their subscriber base by a record, more than 9 million subscribers, for two months in a row. While growth continues to be robust, one factor that could derail it in the future is the lack of adequate spectrum. According to an HSBC telecom report by Rajiv Sharma and Tucker Grinnan, although India’s wireless penetration is just 30%, roughly 62% of the theoretical maximum 2G (second-generation) spectrum has already been allocated. This is assuming that the five new players, who have got approval to launch services by the telecom regulator, will each receive an initial start-up spectrum of 4.4MHz.
As penetration improves, the lack of spectrum to accommodate new capacity will affect growth. According to HSBC, “The only way more spectrum can be allowed per operator would be to relax the current M&A (mergers and acquisitions) regulations.” According to current M&A rules, a company can merge with another operator only three years after receiving its licence. There are other complications as well, such as the one Idea Cellular Ltd faced when it acquired Spice Communications Ltd relating to having spectrum in the same circle.
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Unless M&A norms are relaxed, individual firms will be operating at sub-optimal levels, and industry growth will be restricted. The HSBC analysts assert that encouraging M&A activity is the only way to solve the problem of the expected shortage in spectrum.
Another way is to allow spectrum trading. Established players have a wide reach and subscriber base, while some of the new entrants have been allotted spectrum, but have not started operations and have no subscribers yet. Such idle and surplus spectrum could easily be sold to existing players.
If the above measures are adopted, it would be a win-win situation for both existing and new players—the former would get access to much needed spectrum, while the latter can monetize their asset earlier than expected, either by selling surplus spectrum, or by agreeing to be acquired.
Telecom stocks have suffered heavily since the industry regulator introduced norms that encouraged new entrants and more competition last year. Some stocks have caught up this year, thanks to the impressive subscriber growth. If regulatory pressures and uncertainties ease, these stocks could be in the limelight again.
There is no end to bad news for real estate stocks
Almost invariably, real estate stocks end up as the worst performers on days when the markets fall. On Friday, the Bombay Stock Exchange’s benchmark Sensex index fell by about 3.4%, but its realty index fell by as much as 6.3%.
The index has fallen by 74% from its peak in January, nearly double the rate at which the Sensex has fallen from its peak.
If there were any doubts left that the sector will be the worst-hit because of a liquidity crunch and rising interest rates, a recent survey of Indian companies by Credit Suisse Group AG put them to rest. In a report entitled India—in denial?, the financial services firm surveyed 86 Indian companies to see if they are seeing a slowdown.
The real estate sector was the only one where 100% of the respondents said they saw a slowdown in business. Auto and auto component manufacturers came next, with 83% agreeing.
It’s not surprising that these two sectors topped the list, given their sensitivity to interest rates.
Demand for new homes has already come down, resulting in lower real estate prices across the country. Worse still, banks and financial institutions have become much more cautious about lending to realty firms, leading to a sharp rise in funding costs.
The bad news doesn’t end there. Local brokerage India Infoline Ltd’s institutional equities research team said in a report this week that according to retail companies, developers have been signing anchor tenants—the largest, typically retail, store in a mall—at discounts to going rates. Rentals are estimated to have come down between 10% and 30%, the retailers said.
Thanks to high construction activity throughout India, analysts estimate there’s a relatively high level of unoccupied commercial space. More will be added in the next six months as well, leading to a further deterioration in the situation.
India Infoline added that retailers are now pushing for deals based on revenue-sharing, rather than fixed rentals. If this becomes a trend, it will increase the risk for realtors further, especially since retail spending—especially discretionary spending—is expected to drop in the near term.
It’s no wonder some real estate stocks are now trading at 50-60% discount to their net asset values.
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