Shares of Bharti Airtel Ltd rose by around 2.5% in early trading on Wednesday on news that the Telecom Commission’s new formula for spectrum usage charge will result in lower costs for some telcos. But by the end of the trading session, the shares gave up more than half of those gains, as it became clear that cost savings will be immaterial.
Mint reported earlier this week that Bharti Airtel’s spectrum usage charge is expected to come down to 3.74% of gross revenue, from 4.9% currently. The cost savings would have been meaningful, although the commission also said that aggregate charges would have to match payments made by telcos in fiscal year 2015-16. In other words, there will be no near-term benefits from the move.
From a policy perspective, however, the commission’s decisions on spectrum usage charges are heartening. The government is known to eke out maximum revenues from the sector. By capping spectrum usage charges at FY16 levels and agreeing to a lower (3%) charge for future spectrum auctions, there appears to be a slight shift in its stance.
Of course, this alone isn’t enough to move the needle. Investors in the telecom sector will like to see similar forbearance when it comes to pricing of spectrum in the auctions. Earlier this year, the Telecom Regulatory Authority of India recommended an auction of 700 megahertz (MHz) spectrum with a recommended reserve price of $8.5 billion for a 5MHz block. At the time, Kotak Institutional Equities said that bids for 700MHz spectrum would cause irreparable damage to the industry. A company such as Idea Cellular Ltd, for example, would need to pay $4 billion just for its eight leadership circles. This would increase its already high debt levels by over 70%.
The government has shown no sign of toning down its expectations. In the budget for 2016-17, it has factored in receipts of Rs.55,000 crore from fresh sale of spectrum. In other words, it expects bids worth more than Rs.2 trillion in the coming auctions in order to receive an upfront payment of Rs.55,000 crore. In the March 2015 auction, telcos had paid around 26.5% of the total value of spectrum as upfront payment.
In this backdrop, it’s clearly premature to read too much into the softening of the government’s expectations on spectrum usage charges.
The writer does not own shares in the above-mentioned companies.