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Telecom: Regulatory issues spell distress

Sunaina Vasudev  |  Mumbai 

Telecom stocks are in the line of fire again with the government looking for additional revenues from repricing of spectrum. Consequently, analysts expect potential cash outflows for one-time fees for spectrum holdings in excess of 6.2 MHz and from operator license renewals. It could hit telecom operators hard as it will dilute the impact of improved cash flows from tariff hikes for 2G services announced last quarter.

This was heralded as a return of pricing power in the sector after a prolonged period of hyper competition. The stocks, which were trading at significant premium to the broader market, have taken a knock with Bharti down 12.54 per cent in the last fifteen days and Idea down 12.74 per cent, while the broader Sensex is down about 1.78 per cent.

Analysts expect several adverse regulatory announcements to flow through over the next few months. The primary issue pertains to a proposed fee on telcos holding spectrum beyond 6.2 MHz in any circle. As per the telecom regulator’s (TRAI) recommended formula, this amounts to a balance sheet impact of Rs 5068 crore for Bharti, Rs 1,586 crore for Idea and Rs 97 crore for RCom as per Credit Suisse estimates.

Alternatively, an auction based price discovery could be around Rs 1,770 crore per MHz (close to the TRAI recommended price for regular spectrum below 6.2MHz in the 1800 MHz band and assuming a 50 per cent premium for spectrum  in the 900 MHz band).

This would reduce costs by 50-60% as per IIFL estimates.

The other looming cost is from license renewal for which the government is yet to announce the pricing formula. Price discovery through auctions in each circle could come close to the TRAI spectrum pricing formula. The present value of potential license renewal charges for this is about Rs 15,382 crore for Bharti, Rs 10,790 crore for Idea and Rs 5,856 crore for RCom, as per Credit Suisse estimates, which boils down to Rs 41, Rs 33 and Rs 28 per share and is effectively 12 per cent, 39.3 per cent and 38 per cent of the current share price respectively.

Legally, the one-time fee for excess spectrum amounts to a change in existing license contract and, therefore, can be challenged in court by telecom operators. However, the deeper impact from license renewal is within the contractual mandate, leaving operators with limited legal options.

Investor appetite for the sector has waned mainly because of the possibility of a long-drawn process as these concerns get addressed. Added to this is the impact of the sinking rupee on unhedged dollar exposure on debt (like Bharti’s for its Zain acquisition for $10 billion) and more immediately for capex like equipment imports for the sector at large.

These issues will play on investor sentiment till the risk-reward ratio becomes clearly favourable, say analysts.

First Published: Fri, December 16 2011. 00:33 IST