Telecom's pain, Street's gain...

The government’s 2010-11 Budget target of raising Rs 35,000 crore from the 3G spectrum allotment now looks modest, with the aggregate bid collection expected to be in excess of Rs 58,000 crore. Should telecom sector regulator Trai’s recommendation of pricing 2G airwaves in excess of 6.2 MHz at the rates of newly-discovered 3G airwave price materialise, the government is set to mop up a further Rs 40,000 crore (approximately). This takes the total kitty to over Rs 1 lakh crore, without considering the WiMAX auction. The recent proposal on the pricing of 2G spectrum has added to the woes of telecom players already reeling under the pressure of intense competition and, subsequently, low average revenues per units (Arpus) and profitability.

Since the commencement of 3G bidding on April 9, telecom companies’ share prices have declined 7-18 per cent as against a 4 per cent fall in the market, including the sharp decline witnessed on the day of Trai’s recommendation on “Spectrum Management and Licensing Framework”. Crisil Equities expects the telecom sector, which has a weightage of around 3.1 per cent in the Nifty, to continue to under-perform over the next 12 months.

On the other side, the government now has more options to manage the fiscal deficit. Achieving the fiscal deficit target for 2010-11 is contingent on the government successfully mopping one-time revenues from 3G auctions and disinvestment of its stake in PSUs.

There is not much progress on the divestment front and the danger of oil subsidies rising due to underrecoveries of oil companies and food subsidy exceeding the Budget estimates is very much there.

The revenue windfall from 3G auctions will ease the fiscal burden this year if other revenue and expenditure targets are met. It is more likely that the additional revenue garnered by the auction would partially offset the shortfall in the disinvestment proceeds. It may also give the government flexibility in pricing and timing of its IPOs and FPOs, thereby providing some traction to the markets.

It will also ease the Reserve Bank of India’s task of managing government-borrowing programmes and it augers well for bond yields. However, most of the flexibility will depend on the implementation of Trai’s framework, which is still in the recommendatory phase.

It is important to note that 3G auctions and the recommended 2G fees are a one-time fiscal gain and can help rein in the deficit in 2010-11 only. While enduring fiscal gains will not take place without reforming the subsidy regime and a speedy implementation of GST, the easing pressure on government’s finances spells good news for the markets.

The author is Head, Crisil Equities