Telecom stocks fall as bidding nears end

Analysts fear high spectrum costs could put downward pressure on earnings

Telecom stocks came under selling pressure on Monday as investors feared bids in the ongoing spectrum auction might have far surpassed prior estimates.

Shares of Idea Cellular fell the most at nearly five per cent, followed by Reliance Communications at 4.1 per cent. Market leader Bharti Airtel fell nearly three per cent. The general benchmark indices ended only 0.2 per cent lower.

“The overall bidding in the ongoing auctions are significantly ahead of our estimates, outflows for operators being higher by 30-50 per cent versus our initial estimates,” Barclays said in a report dated March 12.

The bids by telcos have been around 80 per cent more than the base price set by the government. The bidding has reached its final leg. Higher spectrum payments are likely to put further pressure on the already stretched balance sheets of telecom companies.

Telecom stocks had rallied last week on reports that Reliance Jio hadn’t aggressively participated in the auction. As on March 11, the 11th day of auction, bids worth Rs 1 lakh crore had come across various bands. The department of telecom hasn’t yet provided company-specific data.

“If we assume both Bharti and Idea opt for 100 per cent renewals, the cash outlay would be Rs 17,000 crore for Bharti and Rs 30,000 crore for Idea...These are clearly large amounts, though the impact on cash flows could be mitigated, given the staggered payment structures,” went a Nomura report.

The brokerage said high cash outgo could mean high interest costs, a risk for the earnings estimates. “We remain cautious on Indian telcos and reiterate our ‘Reduce’ (rating) on both Bharti and Idea,” it added.

Some analysts feel the pressure on telcos will be relatively lower as the government has allowed payment on a deferred basis (only 25-33 per cent upfront payment). Also, the companies are expected to raise rates, which analysts believe will act as positive triggers for the stock prices to rally.

“While higher spectrum payments are clearly a headwind for the operators, since the payments are on a deferred basis, we expect the near-term impact on balance sheets to be limited,” said the Barclays report.