In a busy mode
Feb 02 2014
With Reliance Jio as a new entrant in the spectrum auction starting Monday, the debt-ridden telecom sector may see aggressive bidding
Analysts believe all eyes would be on Bharti Airtel and unlisted Vodafone that will be looking to retain at least 5 mhz of spectrum in the 900 mhz band. Investors would also be monitoring Mukesh Ambani-led Reliance Jio Infocomm that’s a surprise entrant into the spectrum race.
There are concerns that entry of Ambani firm in the bidding process would result in aggressive bidding among the eight operators in auction for about 403 mhz of spectrum in the 1,800 mhz band and 46 mhz spectrum in the 900 mhz band.
Reliance Jio has deposited Rs 2,600 crore as earnest money. The deposit has led many brokerages to believe that the firm has serious pan-India voice business aspiration and would be looking to bid for significant spectrum.
Reliance Jio is eligible to bid for 5 mhz spectrum in all 22 circles in the 1,800 mhz band along with another 5 mhz spectrum in the 900 mhz band in Delhi, Mumbai and Kolkata circles.
Telewings (Uninor), Aircel and Tata Teleservices would also be participating in the auction other than existing well-established top four players — Bharti Airtel, Vodafone, Idea Cellular and Reliance Communications.
“We expect that in the upcoming spectrum auctions both — Airtel and Vodafone — would be keen to retain at least 5 mhz of spectrum in the 900 mhz band. Moreover, the limited availability in the 900 mhz band may further accentuate the competition for airwaves which might lead to aggressive bidding for this spectrum band,” said Ankita Somani, research analyst for telecom sector at Angel Broking.
“This move could increase pressure on cash flows of telecom companies, the financial of which are already stretched due to high debt taken at the time of 3G auctions. We remain watchful of Rel Jio’s strategy in the upcoming auctions and maintain neutral on the overall telecom sector,” she added.
JP Morgan, in a recent note, cautioned that Reliance Infocomm’s entry in the voice market would propably increase the competitive intensity in the sector, which had started moderating a few quarters ago following four-five years of intense pricing competition.
“If Reliance Jio potentially decides to choose the acquisition route to scale up and shows an interest in the GSM operations of existing players, we think the pressure on industry and the other pan-India incumbents (like Bharti Airtel, Vodafone and Idea) would be less severe,” the report added.
Last week, an empowered group of ministers (EGoM) decided to levy annual spectrum usage charge (SUC) on new airwaves for mobile services at 5 per cent. SUC is an annual levy charged on the gross revenue of telecom players. This was against the prevailing rate of 3-8 per cent, depending on the spectrum holding, the time and rate at which the airwaves have been acquired.
However, Reliance Jio Infocomm of Mukesh Ambani and Trikona, which hold broadband wireless access (BWA) spectrum to roll out 4G services, would continue to pay 1 per cent SUC.
Bharti too has BWA spectrum in 12 circles and hence continuation of 1 per cent SUC is seen to benefit it too in the long run when revenue from BWA services attains scale.
Meanwhile, the recent third quarter earnings were a mixed bag for domestic telecom operators. Despite firms such as Bharti and Idea Cellular reporting three-digit year-on-year (YoY) growth in bottomline, the results came in quite lower than market expectations. What hurt most was sequential growth in their domestic wireless revenues which stood at 3-5 per cent for the December quarter.
Bharti Airtel had been struggling for quite some time to meet market expectations. In that sense, the results were ‘broadly in line’ with market expectations. Idea, on the other hand, had been the top bet in telecom space for quite some time. However, analysts see a possible peaking of its margins.
Some even question its 20 per cent premium in valuations over Bharti Airtel. Reliance Communications (RCom) is yet to report its earnings.
Bhuvnesh Singh of Barclays said weak mobile revenue growth for Bharti Airtel was a surprise as it comes against the backdrop of reduced competition and positive commentary.
“African margins were also subdued and we believe that the management’s margin expectations from Africa could have been scaled down. Tax rates were significantly higher on account of certain one-offs. Post results, we reduce our Ebitda estimates by 4 per cent/5 per cent for FY14/15, leading to a sharp 45/21 per cent reduction in our EPS estimates. However, strong free cash generation over the next three years (Rs 43,100 crore) along with improving regulatory environment leads us to maintain our overweight rating on the stock,” Singh said.
Sachin Gupta of Nomura India pointed out that unlike Idea where consensus expectations were generally high; Bharti has struggled to meet market expectations in recent quarters.
“This result is not bad in that context, but not overly exciting either. Domestic voice price rose 1 per cent and volumes 1.5 per cent. Revenue growth was 30 per cent and Ebitda growth was 5 per cent, so margins rose 60bp, which is better than Idea. But Africa is still a struggle — margins fell 110bp to 25.8 per cent. There are one-offs, no doubt, but that is an ongoing thing. Even for 9M14, margins were flat YoY at 26.5 per cent.
On Idea, Rumit Dugar of Religare Securities is cautious given high expectations in the face of additional competitive intensity.
“We expect Idea’s focus to now shift to data capex and spectrum assets. We believe that street capex expectations remain low and the entry of new player RIL could kickstart the data capex cycle. With the earnings upgrade cycle slowing down, valuations premium to Bharti (20 per cent) might not sustain,” he said.
The management commentaries for Idea and Bharti suggested the firms see more room for reduction in the discounted minutes while they do not see hike in voice tariffs for the next one or two quarters.