Telecom companies' shares under pressure ahead of DoT meet

Shares of leading telecom operators witnessed intense selling pressure ahead of a meeting of the telecom ministry tomorrow to take a decision on spectrum pricing. The Department of Telecom (DoT) is likely to take a final call on the recommendations made by the Telecom Regulatory Authority of India (Trai), which had proposed a near 10-fold increase in the reserve price for spectrum over what operators had paid in 2008.

On fears that the recommendations might be accepted, shares of top telecom player Bharti Airtel ended at Rs 281.95, down 4.3 per cent, making it the worst performer in the 30-share Sensex. Idea Cellular declined 3.5 per cent to Rs 74.95, while, Reliance Communications (RCom) declined 1.93 per cent to Rs 63.1. The benchmark Sensex on Wednesday closed 0.5 per cent lower at 15,948.

Market experts said the start of a price war in the 3G segment with telcos slashing rates by up to 70 per cent also weighed on investor sentiment.

In April, Trai has recommended a reserve price of Rs 3,622 crore per megahertz (MHz) of spectrum in the 1,800-MHz band, and Rs 7,244 crore per MHz in the 800-MHz and 900-MHz bands.

Most analysts have pointed out that the recommendations will push up costs and hurt profitability of telecom operators.

In its assessment of Trai’s recommendations, accounting and consulting firm PwC said the financial performance of mobile operators will be impacted due to the proposed heavy spectrum costs. It said telcos, which are witnessing profit margin erosion and an unsustainable debt burden, will not be able to absorb cost increases as they have done in the past.

Leading foreign brokerage Goldman Sachs on Tuesday downgraded telecom stocks, including Idea and RCom, and cut its price target on Bharti Airtel.

“We see increasing regulatory risk for Indian telcos as the DoT may accept Trai’s recommendations on spectrum pricing at the upcoming meeting,” it said in a research note.

Goldman has slashed its price target on Bharti by 14 per cent to Rs 360. The cut in price target in case of Idea has been much steeper by 28 per cent to Rs 80, while it’s 37 per cent in case of RCom to Rs 50.