Bharti Airtel Ltd and Idea Cellular Ltd’s shares have risen 15-16% since end-October. Investors had begun pricing in a subdued response to the auctions late last month, after details about the earnest money deposits became public. The final auction results last week only confirmed what a number of investors had already anticipated; so much so that Idea’s shares have actually been flat since the auction results were announced last week.
Ankur Rudra, an analyst at Ambit Capital, points out that no spectrum was sold in the country’s largest and three most expensive circles—Delhi, Mumbai and Karnataka—which together accounted for nearly 50% of the expected sale value. “As a result, the outgo for the incumbents on excess spectrum as well as the renewal charges for 900MHz (megahertz) spectrum is likely to be considerably lower than anticipated,” says Rudra.
The government’s plan was to use the discovered price in the auctions as the base for prospective excess spectrum fee. As analysts at Credit Suisse Securities (India) Pvt. Ltd put it in a recent report, “(Thanks to the) tame bidding in the auctions, we believe that the old floor on the regulatory burden has now become a ceiling for various regulatory payments which were linked to the market price of spectrum.”
Besides, based on the auction results, it now appears that the competitive intensity will reduce. The fear earlier was that Reliance Industries Ltd (RIL) would bid directly or indirectly in the auctions, because of which the pressure on tariffs would remain. But most analysts are now betting that the aggressive discounting in the marketplace will start reducing.
A Credit Suisse report dated 19 November says, “Our checks indicate that over the past few weeks operators have started testing the market for tariff hikes by reducing discounts.” Additionally, given the high indebtedness of most telecom firms, it seems unlikely that any company will continue to be aggressive with tariffs, at a time when the others are looking to raise them.
In this backdrop, it isn’t surprising that the telecom stocks have risen sharply. But given the history of high regulatory risk in the sector, investors shouldn’t completely rule out regulatory surprises.