2G spectrum auction flop, positive for telcos

The failed 2G auction show might not have resolved the confusion surrounding pricing of spectrum, analyst feel that the flop show has positives for the telecom sector.

Brokerage firm CLSA in its report said that the failed 2G auction was a significant positive for the telecom sector as multiple charges specifically, excess spectrum, 2G licence renewals and refarming are set to be bench marked lower.

“No price discovery in a few circles and only partial success in most others – auctions cannot be termed as a success and Government’s pricing philosophy as well as reserve prices set will likely be questioned,” said Rohit Chordia and Shyam M of Kotak Institutional Equities Research in their report.

Analysts from Nomura Equity Research in their reported said that the current confusion may either make the regulator will cut the reserve price and start again (in some or all circles); or, potentially use these auction prices as a basis to derive the price for incremental circles; or look for new alternatives altogether. “Getting this “spectrum price” is critical given the license renewals will begin in the next two years, and gradually more spectrum will also be released for 4G/LTE or else,” said Sachin Gupta, Neeraja Natrajan of Nomura Equity Research in their report.

The government managed to raise Rs 9,400 crore of the Rs 40,000-crore target via the recently concluded auction. All 22 circles other than Bihar, UP-East, UP-West and Gujarat circles had lower demand than supply and four circles -- Delhi, Mumbai, Karnataka and Rajasthan -- accounting for 51 per cent of reserve price had zero bids.

Analysts also believe that the government may not be able to get the entire amount of Rs 9,400 crore. “The actual cash inflow for FY2013E could be lower on account of two factors – (1) operators have a deferred payment option; they can choose to pay anywhere between 33 per cent and 100 per cent now and the rest in 10 equal installments starting two years from now, and (2) operators who had their licenses cancelled by the SC will likely be allowed to set off the earlier-paid entry fee against the payments for these auctions. We do not know the exact contours of how this set-off figure would be computed,” said the research note by Kotak.

Analyst are also positive about this failure as incremental cash outflows will likely be lower than initially expected. Many are also hoping that there will be hike in voice price, which has potential to drive earnings for all telcos.