Telecom shares slump on high spectrum prices

Though demand for airwaves were below govt's expectations, it was way above their estimates

Shares of telecom companies dropped on Monday on concern rising prices in the ongoing 2G spectrum auctions would hurt profitability. While Bharti Airtel fell 2.6 per cent to Rs 307.40, Idea Cellular fell 8.4 per cent to Rs 126.50 and Reliance Communications declined four per cent to Rs 120.35. The benchmark Sensex fell 0.2 per cent, snapping a four-session winning streak. The Nifty dropped 0.16 per cent Blue-chip stocks were also hit after foreign investors sold a net $39.88 million worth of shares in the secondary market on Friday, extending their selling streak to a seventh day and increasing total outflows to $582.02 million.

“We are lowering our target prices for Bharti and Idea six-seven per cent, given the higher regulatory risks for future auctions, as higher payouts will lead to higher interest and depreciation costs,” said Morgan Stanley analysts, led by Vinay Jaising. The investment bank has cut its target price for Bharti by Rs 29 a share to Rs 409; for Idea, it has cut the price by Rs 16 a share to Rs 202.

Analysts said though the demand for airwaves was below the government’s expectations, it was way above their estimates. IDFC Securities said so far, three metropolitan cities — Delhi, Mumbai and Kolkata — had cumulatively seen a 77 per cent rise in prices in the 900-MHz band. “Currently, we build in Rs 12,200 crore for Bharti Airtel and Rs 4,200 crore for Idea Cellular through the next 12 months for spectrum-related payouts,” IDFC Security Analysts Hitesh Shah and Abhishek Gupta said.

Morgan Stanley analysts said, “On FY15 estimated earnings, Idea trades at 6.3 times Ebitda and Bharti at 6.1 times, near all-time lows. Idea is our favourite due to a price correction of 25 per cent from peak levels; and higher leverage to average revenue per minute.”