The recent strength of telecom stocks is surprising, to say the least. Telecom service providers will be paying spectrum fees at a higher rate from 1 April. Besides, bidding for so-called third-generation, or 3G, licences is likely to be quite intense.
The utility of a 3G licence is quite high for incumbents such as Bharti Airtel Ltd, Vodafone Essar Ltd and Idea Cellular Ltd. According to a recent report by Citigroup Inc., “In metros and A circles, 3G will be used 1) as a deterrent to post-paid churn post-number portability, and 2) for voice capacity enhancement (especially by market leaders in each circle).” These factors, coupled with the limited number of slots available in the 3G auction, will lead to high bidding.
In most circles, only three slots are available. According to an analyst, who did not want to be identified, in the metros and A circles, there will be serious bidding from at least five players. As a result, the bids are likely to be considerably higher than the reserve price of Rs3,500 crore for a nationwide 3G licence. Besides, according to him, telecom operators will have to invest $400-500 million (Rs1,820-2,275 crore) annually for the next two-three years in setting up the 3G telecom network.
Graphic: Yogesh Kumar / Mint
All this will add up to a high capital cost, the returns on which will be a long way coming. Demand for 3G services is expected to grow gradually in the country. According to HSBC Research, 3G service penetration will be gradual in India, largely driven by the low penetration of 3G-enabled handsets. Currently, only 30 million subscribers are estimated to have 3G-enabled handsets, representing less than 6% of the total subscriber base.
While it was always evident that 3G will be a long-gestation project for telecom service providers, a higher-than-expected bidding amount will mean that earnings and returns will get diluted for a longer-than-expected period.
Despite all this, telecom stocks rose sharply last week, much faster than the 2.4% rise in the Nifty. While Idea led with a rise of 15%, Reliance Communications Ltd’s shares rose by 6.6% and Bharti’s shares gained 4.3%. Perhaps there will be a reality check when the bid amounts are announced in April.
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