With revenue sharing model under scanner, telcos woes are far from over

As the government finished taking its decisions on the base fee for spectrum auction and eased merger and acquisition rules, it had started to look like the troubles of the telecom sector are finally starting to end. But, that is not to be.

The High Court recently allowed Comptroller and Auditor General (CAG) to go ahead and investigate the revenue sharing model of private telecom operators. Very few analysts are convinced that telecom operators will come out clean from these audits.

This is especially after audits conducted earlier had not seen very fruitful results. The Department of Telecommunications (DoT) audited five telecom companies— Bharti Airtel, Vodafone India, Reliance Communications, Tata Teleservices and Idea Cellular in 2007-08.

“Private auditors appointed by DoT audits said that five telcos together understated revenues by around Rs1,030 crore in these two years. Based on audit findings in mid-2012, DoT penalised Rs 1,600 crore,” said a report by HSBC.

As per the licence conditions, telecom operators pay 6-10% of their annual revenues as licence fee. Added to that, they pay two to three per cent as spectrum usage charges. “Most of telecom operators have been under-reporting revenues. There could be some negative surprises for the sector,” commented Mahantesh Marilinga, senior research analyst at Finquest.

Reports by CAG earlier on the 2008 telecom licence scam had resulted in the cancellation of 122 licences. This time around, the results might not be as grave, but they do expect some sort of penalty to be slapped on a few operators.

Telecom stocks of all listed companies had fallen ever since the CAG audit was legalised. While Airtel fell by 0.7%, Idea fell by 1%. Reliance Communications slipped the most, at 4%. “Whenever these long-drawn audits start, there will be pressure on the stocks. There could be a reversal of re-rating of the sector,” said Marilinga.

With increasing data revenues and reduced competition, many analysts have been predicting a good run for the stocks going ahead. They were also expecting a good performance in the third quarter, but these fortunes could be reversed.

“Revenue per minute should continue to inch up despite the absence of a headline hike as headroom remains for reducing discounts given that realisation is still 20-35% lower than the headline rate.

Wireless revenues should rise two to four per cent quarter-on-quarter for Bharti and Idea,” predicted a Citi report.

Mahesh Uppal, director of ComFirst India said that telcos would be relieved to come out of the audit unscathed. “The decision to require a CAG audit is certainly a setback but the serious players should gain from the focus on increased transparency that the audit also implies” he said.