Telecom mess: Time to pay for past ills

Stocks will remain in the doldrums as the government appears keen to come clean in the 2G scam.

It’s payback time for the telecom industry, as the government seeks to plug regulatory loopholes. While the sector has come a long way in the last decade, with 700 million subscribers and $35 billion in revenues, nobody is cheering. For the last three years, telecom stocks have broadly underperformed the market, as revenue growth and profitability have come under pressure due to increased competition and an unstable regulatory environment. In no time has the sector turned into an ugly duckling.

The woes are nowhere near easing with the Telecom Regulatory Authority of India’s (Trai’s) decision to charge one-time fee from players holding more than 6.2 MHz of 2G spectrum. This implies an additional outflow of Rs 15,000 crore for all, especially Bharti (Rs 3,300 crore), Idea (Rs 1,320 crore), RCom (Rs 78 crore), BSNL and MTNL (Rs 7,500 crore). Vodafone, Aircel and Loop will also have to pay up.

Interestingly, in May 2010, Trai had recommended that telcos holding spectrum beyond the contracted quantum would have to pay excess charges at the current price (3G auction price in that particular circle), pro-rated for the period of the remaining validity of their licences. Excess spectrum beyond 8 MHz would be charged at 1.3 times the current price. Excess spectrum in the 900 MHz band would be charged 1.5 times the 3G spectrum price. According to Ambit Capital’s telecom report on financial implications of these regulatory changes, companies would have to pay approximately Rs 17,647 crore as excess spectrum under the 2010 formula. Trai may have tinkered with the variables but has come out with the same result under the new formula.

Clearly, there is more pain in store for the sector as the government is bent on making players pay for all past ills. With Trai making telcos pay for excess spectrum, the next in line are those who were allotted universal access licences in 2008 at 2001 prices. These players may have to pay for 4.4 MHz spectrum. This would take care of losses alleged by the Comptroller and Auditor General in its report. While irregularities in 2G allotment are still being investigated, the industry is also expecting users of dual technology to cough up more as spectrum charges. If the government decides to re-price the 2G licences issued in 2008 and make dual technology users pay, the financial implications for telecom companies will change yet again.

For instance, if Idea has to pay for nine new licences it got in 2008, it will have to pay additional charges of Rs 1,600 crore, believe analysts. This, combined with excess spectrum charges, will add up to Rs 2,900 crore, which is equal to Idea’s annual capital expenditure. This is not good news for its balance sheet or profit and loss account. In case the 2008 licences are repriced and a levy is imposed on dual use technology, Rcom may have to shell out Rs 2,700 crore.