Confusion & delays, yet telecom shares to remain range-bound

Confusion & delays, yet telecom shares to remain range-bound

There is no end to confusion and delay on third-generation (3G) and mobile number portability (MNP). Although the empowered group of ministers has already recommended auction of up to four spectrum blocks per circle, there is still lack of consensus within the government as well as among operators on critical issues, such as number of 3G players per circle, auction timing and payment schedule for winning bidders.

The department of telecom (DoT) is yet to release a notice inviting applications (NIA) that would contain these details. There is growing likelihood that 3G auctions would not happen in the current fiscal. Separately, the DoT has said that MNP would be introduced across all circles by March against the earlier deadline of December.

Also See Low Ring (Graphics)

In a new tariff pack for its prepaid global system for mobile (GSM) and code division multiple access (CDMA) subscribers, Reliance Communications Ltd (RCom) is offering local on-net calls at 20p, for a monthly fee of Rs27. Based on our assumed usage pattern for an average subscriber, we estimate that the average revenue per month would be 5% lower against that on the Simply Reliance plans (50p per minute or 1p per second). RCom is also giving another option that entails a call rate of 20p per minute for both local and national long-distance (NLD) on-net calls. The customers is charged a monthly fee of Rs77, which indicates the plan is more suited to subscribers with high NLD usage.

Meanwhile, GTL Infrastructure Ltd has entered into exclusive talks with Aircel Ltd (74% owned by Maxis Bhd of Malaysia) to buy the latter’s cellular towers. Reports have mentioned transaction enterprise value (EV) of Rs8,500 crore (including Rs4,800 crore debt) implying EV/tower of Rs49 lakh, which is in line with recent deals.

Etisalat has picked up an additional 5.3% equity stake in its Indian joint venture, Etisalat DB (Swan Telecom); and Citibank has sold its interest in Bharti Infratel Ltd to JPMorgan, for $50 million (same as entry price).

Share prices of leading telcos (Bharti Airtel Ltd, RCom and Idea Cellular Ltd) have recovered by 9-23% from their November lows. In our view, this has been primarily driven by strong subscriber net additions in November as well as improved sentiment led by absence of negative news flow—no headlines on tariff cuts, ongoing delays in 3G auctions and MNP.

However, competition risks remain elevated, given the sector’s overcapacity. We expect the stocks to remain range-bound. We retain our sell ratings on Bharti, RCom and Idea. Our suggested entry point for Bharti is Rs275 (13x our estimated FY11 earnings per share) from a short-term trading perspective.

Graphics by Yogesh Kumar/Mint