The Telecom Regulatory Authority of India’s (Trai) recommendations on 2G (second-generation) spectrum allocation and pricing, licensing and mergers and acquisitions are enormously negative for incumbents who use GSM technology, such as Bharti Airtel Ltd and Idea Cellular Ltd. So much so that some analysts think that the recommendations are not likely to be accepted by the government in total.
Still, investors are factoring in the worst. Share prices of both Bharti Airtel and Idea Cellular have fallen by at least 12% since the recommendations were made public two days ago. This comes on the back of a 6% and 7.5% drop, respectively, in their share prices due to the soaring auction price of 3G spectrum.
According to analysis by Anand Rathi Research, the total impact of all the new proposals works out to Rs26.30 per share. This is after accounting for the benefit of Rs18.50 per share from the proposed reduction of annual licence fee to a uniform 6%. Bharti’s shares have already fallen by Rs36 per share since the proposals came out.
Graphic: Yogesh Kumar/Mint
The negative impact is on account of four major factors—a one-time fee for excess 2G spectrum (over 6.2 MHz); an increase in spectrum usage charge for spectrum over 6.2 MHz; a licence renewal cost; and a licence fee of 6% on tower infrastructure companies and Internet service providers.
But there are some other recommendations for which analysts including those at Anand Rathi haven’t quantified the impact.
For instance, Trai has proposed that 900MHz spectrum held by a licensee should be replaced by assignment of equal amount of spectrum in 1,800MHz. 900MHz gives some of the older operators a huge advantage due to its far lower capex requirement and a reallocation of this spectrum would be detrimental to valuations, although it’s difficult to quantify the impact.
The new proposals don’t affect new operators in the GSM space as much because they don’t hold excess spectrum. It’s little wonder that shares of Reliance Communications Ltd have fallen by only 5% in the past two trading sessions.
While there is the possibility that the government may reject some of the proposals, it doesn’t make much sense to buy telecom shares at this point, given the plethora of negatives and the uncertainty in the sector, especially related to regulation.
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