Telecom sector ready to head out of the woods

Cut in spectrum price and usage charges a positive for the sector

Telecom stocks have been rallying since the Telecom Regulatory Authority of India (Trai) came out with its recommendations on spectrum pricing, usage charge, re-farming and trading. Analysts say after the failure of consecutive auctions (November 2012 and March 2013), Trai has recommended a 37 per cent cut in the spectrum reserve price for 1,800 MHz and 62 per cent for 900Mhz band in the Delhi, Mumbai and Kolkata circles.

The pan-India reserve price stands at Rs 1,496 crore per MHz, compared with the Rs 2,378 crore per MHz earlier. The new spectrum pricing has been driven by a new valuation metric and not on historical prices, by which operators had acquired spectrum. The telcos had bid very high rates for 3G spectrum. Trai has come out with a new pricing formula, despite partial success of the November auction in at least 18 circles. According to Emkay Global, operators who had bid for those 18 circles, might take the legal route against the regulator to seek a refund.

The other downside risk to lower spectrum prices would be increase in competitive intensity. The cut in reserve prices could bring more bidders and increase competition in metro and category A circles. According to Avendus Securities, the possibility of some telcos aggressively bidding for the spectrum in 900 MHz band and a rise in the operators per circle in the metro and category A circles due to the new licencees' acquisition of the spectrum in 1,800 MHz band could offset the perceived benefit of a cut in spectrum levies. However, stricter norms on roll-out of operations might deter non-serious players.

In addition, Trai has recommended uniform spectrum usage charges. The regulator has proposed a flat three per cent spectrum usage charge on adjusted gross revenue. Avendus believes a cut in spectrum usage charges may not be approved by the Cabinet, owing to potential loss of revenue. Currently, operators pay three to eight per cent depending on how much spectrum they hold. This measure will straightaway add to the operating profit of the telcos, a big positive for the sector.

However, what will matter is the earnings growth of operators. Analysts believe Bharti is better placed among the top three players, thanks to the high penetration level in its top-five circles. The company earned 55 per cent of its revenues from the metros and category A circles, while Idea earned 48 per cent from the same circles. So, if there is a rise in tariff and average revenue per user increases, then Bharti benefits the most.