'RIL's entry in auction to hurt incumbents'

Reliance Infotel’s plan to participate in the coming auction of second-generation (2G) spectrum has investors concerned about the impact on the core voice business of incumbent operators, including listed mobile service providers Bharti Airtel and Idea Cellular.

Reliance Industries, the country’s most valued company, acquired 95 per cent stake in Infotel Broadband for Rs 4,800 crore soon after it won broadband spectrum in all 22 telecom circles in June 2010. The company also agreed to pay an additional Rs 12,848 crore ($2.7 billion) for the spectrum to the government. This had led to a belief that Reliance Infotel would launch Long Term Evolution (LTE) technology-based broadband wireless (4G) service.

Last month, the company participated in the pre-bid conference for auction of 2G spectrum, to start on November 12. Buying spectrum through auction would help Reliance Infotel become a game changer by bundling voice with data services.

“We see significant risks to the industry-leading revenue market share of Bharti from the potential launch of data+voice services by RIL Infotel,” said Sunil Tirumalai, research analyst with foreign brokerage Credit Suisse, while downgrading the stock to ‘underperform’. He expressed the same concern for Idea cellular’s market share while retaining the stock ‘underperform’ rating.

Reliance’s participation also means a high likelihood of spectrum auctions succeeding at the current reserve price of Rs 18,000 crore for a 6 MHz pan-India licence in the 1,800 MHz band. This is 10 times higher than the price at which 2G licences were allocated in 2008 under former telecom minister A Raja. Early this year, the Supreme Court cancelled 122 licences allotted to 11 companies during the tenure of the minister, after declaring it illegal.

The entry of a large, well-capitalised player with a significant differentiator increases the likelihood of auction prices being bid up aggressively. “We believe Idea, unlike other incumbents, is somewhat forced to participate in the upcoming auction as seven of its licences have been cancelled,” said Rajiv Sharma, analyst at global brokerage HSBC Securities and Capital Markets.”Our estimates include $350 mn as incremental capital expenditure for spectrum in FY13,” said Sharma, who has a ‘neutral’ rating for the stock.

The reason Reliance Infotel is shunning a pure voice strategy is based on addressable market size. An estimate says a data-only LTE strategy could lead to a small addressable market of about $750 mn revenue, not enough to build a business case, given the $2.5 bn paid for spectrum in 2010. However, bundling voice with LTE could help RIL Infotel expand the addressable market manifold, to about $8 bn.

“The success of Reliance Infotel would largely depend on TDD LTE handset prices,” said Alok Ranjan, head portfolio management service, at domestic brokerage Way2Wealth. “If the company manages to negotiate handset prices to about Rs 7,500, then it potentially stands to gain a significant share of industry revenue, thus challenging the incumbents.”