It’s still premature to say whether incumbent telecom firms will gain

It’s still premature to say whether incumbent telecom firms will gain
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First Published: Tue, Nov 30 2010. 10 17 PM IST

Graphic: Yogesh Kumar/Mint
Graphic: Yogesh Kumar/Mint
Updated: Tue, Nov 30 2010. 10 17 PM IST
Shares of incumbent telecom operators Bharti Airtel Ltd and Idea Cellular Ltd rose sharply on the possibility that the government may clamp down on new operators. Bharti’s shares rose by over 6% on the National Stock Exchange, while shares of Idea rose by over 3%. Compared with their lows earlier in the month, these companies’ shares have risen by 18% and 9%, respectively. On the contrary, shares of Reliance Communications Ltd (RCom) have fallen by as much as 28% in the past one month.
The reasoning is quite simple: the investigations related to the spectrum allocation scam and the government’s statements since seem to suggest that the new operators would be affected.
Graphic: Yogesh Kumar/Mint
The new telecom minister said the government will cancel the licences of operators who were ineligible at the time of licence application in 2008. So, incumbents would gain as this would reduce the competitive intensity in the industry. But the above reasoning is too simplistic. For any meaningful impact on the business fundamentals of incumbent operators, one or more of the large new operators need to close down, or consolidate operations with another firm. Only then would the overcapacity situation in the industry be addressed and competitive intensity reduce. If the investigations into the scam only lead to a consolidation of telecom licences of fringe players such as Videocon, nothing would really change as far as industry fundamentals go. Some of the new operators with licences haven’t even begun operations.
It’s only when large players such as RCom, Tata DoCoMo or, to a lesser extent, Uninor engage in consolidation that the overcapacity situation will change. No one seems to be expecting that to happen. The sharp rise in the share price of incumbent operators, therefore, can be attributed to investor sentiment, rather than any material impact on their fundamentals.
What’s more, the heat on new operators is a reminder of the regulatory risk in the sector. It’s foolhardy to assume that incumbents would always be in a relatively favourable position on regulatory issues. The sector continues to face regulatory risks on issues such as licence renewal fees. Besides, with mobile number portability round the corner, tariffs could come under pressure all over again. This would affect the post-paid segment, which has so far been rather resilient. As a result, the financial performance of telecom operators can be expected to be subdued. Likewise, the shares of these companies should be range-bound and, considering that they have risen at a time hen the markets have been correcting, they may well come under pressure in the near term.
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First Published: Tue, Nov 30 2010. 10 17 PM IST