Are telecom firms the govt’s golden goose?
The Cabinet has approved the spectrum auction plan recommended by the department of telecommunication. The value of the spectrum that is being put up for the auction is more than Rs.5 trillion, based on the proposed reserve price. Hardly anyone expects telecom companies to bid for the entire spectrum; although based on past experience, with Indian telecom firms, you can never say never.
About three-fourths of the total spectrum on offer, in value terms, is in the 700 megahertz (MHz) band. Telecom firms such as Bharti Airtel Ltd have said that the pricing makes it unaffordable. Also, if the government has managed to make contiguous blocks of 1800MHz spectrum available in the auction, the demand for spectrum in the 700MHz band will naturally be low.
Most importantly, the sector’s debt is already at monumental levels and based on leverage metrics such as debt/Ebitda, there is hardly any leeway in terms of taking on much additional debt. As such, the Rs.4 trillion worth 700MHz spectrum should ideally be left untouched.
Even so, some telecom firms may still explore bidding in a few circles—such as B and C circles— where pricing of this spectrum is not as expensive vis-à-vis other bands. If bidding is restricted to these circles, investors will be largely unconcerned. But if extends to other circles, and telecom firms get bold as they have in some previous auctions, investors have much to worry.
As pointed earlier in this column, the government’s approach leaves much to be desired. It seems to be least bothered about the financial health of the industry, and is treating it as a golden goose.
Of course, the government can’t be entirely blamed when telcos themselves have been reckless while bidding in past auctions. According to analysts, this is one of the reasons telecom stocks have underperformed in recent months. The upcoming mega auction is making some investors nervous. Analysts at Kotak Institutional Equities said in a note to clients earlier this year, “Even as Bharti India CEO, in the 3QFY16 earnings concall, repeatedly termed the Trai’s (Telecom Regulatory Authority of India’s) proposed 700MHz spectrum reserve prices ‘unaffordable’, we hope we do not end up with a treatise titled ‘Art of buying the unaffordable, volume 3’ sometime post the proposed auctions.”
The writer does not own shares in the above-mentioned companies.