Disrupted signals

There has been yet another violent disruption in signals for the telecom sector, once again from the regulatory side, even as stabilising competition and tariffs were suggesting a return to normalcy.

The recommendations of the special committee(asked by the TRAI to look into 1800 MHz spectrum pricing) , if implemented, would entail large payouts by incumbent telecom operators. On a per Mhz

basis, spectrum up to 6.2 Mhz is to be priced at 53 per cent of 3G auction prices held last year, while for beyond 6.2 Mhz it is 136 per cent the 3G price.

Collectively, the industry has to shell out a total of over Rs 16,000 crore for the excess spectrum held . Individually, Bharti Airtel would be liable to pay over Rs 4,000 crore; Idea Cellular about Rs 1,600 crore, while Reliance Communications may see a comparatively moderate outflow of Rs 70 crore. Vodafone, MTNL and BSNL too would be affected.

All this, in addition to the May 2010 proposal of the TRAI, which entailed ‘re-farming' of spectrum in the 900 Mhz band, which means that operators would have to contend with significant increase in capex and operating expenditure (opex). With the licences of Bharti and Idea coming up for renewal in the not-too-distant future, there would also be massive outflows over the next 10 years as the licences would be priced according to the new formula indicated earlier.

Bharti has a net debt-to-equity ratio of 1.28 and has an operation free cash flow of around Rs 5,040 crore. It already has a net debt of Rs 59946.3 crore, as of December 2010. Idea is slightly better placed with a net debt-to-equity ratio of 0.77. It has a net debt of Rs 9292.4 crore. Not surprisingly, the stocks of operators were down 10 per cent.

Ironically, mobile operators were just about witnessing stability in operations after six-eight new operators commenced operations in late 2009 and 2010 in each circle, resulting in unprecedented tariff wars, leading to revenues and margin erosion.

Operationally stable

Over the last couple of quarters, ARPU (average revenue per user) was beginning to stabilise or fall just marginally, when the 5-7 per cent slump sequentially was almost a norm earlier. Realisations per minute, a good indicator of operator fortunes, has held reasonably steady for Bharti, Idea and RCom.

And it is not as if all incumbents came out of the tariff war unscathed. MTNL and BSNL have slipped into losses and TTML (Tata Teleservices Maharashtra) continues to be unprofitable. Bharti, Vodafone, Idea and Reliance Communications together command more than 77 per cent of the revenue market share between them, as new operators still don't seem to have made any significant inroads.

The peak capex for 2G operations is over for most of the bigger players. Idea has reduced losses in new circles and Bharti has successfully integrated Zain's operations.

All priced in?

In the recent fall in the markets, telecom stocks slid less than the broader markets, till the new announcement came in. For investors, the call would be whether all the negativities have been factored in the prices of companies. Do Bharti at 13 times trailing earnings and an RCom at five times present buying opportunities? We feel that it may be time to reduce overall weights to the sector in light of the constant flip-flops on policy matters.

There is a silver lining in the recommendations too. Licence fee has been has been set at a fixed 6 per cent (from 2014) of adjusted gross revenues, compared to levels of up to 10 per cent currently. The potential listing of Indus Towers (for Idea and Bharti) and Reliance Infratel (for RCom) would bring in the much-needed cash inflows.

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