BackInvestor fear seems overdone in telecom
Incumbents are more likely to have some understanding with each other rather than bid up prices in areas where their rivals need renewal spectrum
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Shares of Bharti Airtel Ltd and Idea Cellular Ltd have fallen by 4.7% and 6.4%, respectively, in the past two trading sessions after the government decided on a higher-than-expected minimum price for the telecom spectrum auction in the 2100 megahertz (MHz) band. Cumulatively they lost over $1.9 billion in value. This is despite Idea Cellular’s better-than-expected earnings announcement on Tuesday, which should normally have resulted in higher demand for both stocks.
The bench price for 3G spectrum has been set at ₹ 3,705 crore per MHz, or about 10% higher than the discovered price in the 2010 auction. In the 3G spectrum auction five years ago, telecom companies had bid so irrationally that analysts tracking the sector agreed that the exercise had destroyed value. Even telecom companies became wiser, causing some of the auctions conducted by the previous government to fail because of high reserve prices.
The stage now seems set for another auction failure.
Telecom companies may well resort to intra-circle roaming pacts to service areas where they do not have spectrum; and wait for the next auction which will include 3G spectrum released by the defence ministry. After all, why should they bid at a high price now and set the tone for the upcoming auction?
Why should investors be worried if the companies can be expected to not bid irrationally for 3G spectrum? One of the concerns is that bidding can get aggressive for 2G spectrum, especially in areas where the firms are forced to bid for renewal spectrum. Another fear is that Reliance Jio Infocomm Ltd may play spoilsport in the auction for 900MHz auction by bidding up prices.
These fears are overdone. For one, incumbents are unlikely to bid up prices in areas where their rivals need renewal spectrum, to avoid similar treatment in the areas they need spectrum. Besides, current valuations already factor in the downside of fairly high bids in the 2G auction.
Despite a surge in profits, telecom stocks have underperformed the markets by 17-20% in the past year. Apart from the uncertainty about the auctions, investors have also been worried about the impending entry of Reliance Jio. The fears are beginning to look a bit overblown.
The writer doesn’t own shares in the above-mentioned companies.
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