India Telecom — Who Wins In The New Regime? Ambit research

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THEMATIC
India Telecom — Who Wins In The New Regime?

The Indian telecom sector has come a long way over the last decade, from being monopolistic in the late 90s to becoming a poster boy of the Indian liberalization story. The supernormal growth in subscriber net additions (average 18mn subscribers per month over the Oct 2009-Oct 2010 period); a total subscriber base of over 700mn by October 2010 and industry revenue of Rs1,580bn (US$35bn) in FY10 have created significant interest in the sector.

Sector dynamics have, however, changed dramatically in the last three years owing to increased competition, a sharp drop in tariffs and an unstable (and possibly corrupt) regulatory environment. Consequently, revenue growth as well as the profitability of the sector have been under pressure and investor interest in the sector has waned with all the listed stocks underperforming the broader market in the last three years.

Current scenario: The sector is currently plagued by regulatory uncertainty due to the alleged scam in the 2008 spectrum allocation. We understand that the Government is investigating four specific issues: (1) allotment of universal access services (UAS) licences to new entrants in 2008 at 2001 prices; (2) alleged irregularities in the allotment process; (3) award of incremental 2G spectrum beyond the contractual limit of 6.2MHz; and (4) allowing dual technology services. These issues have led to a change in the top rung of the Union Telecom Ministry (DoT) with Mr Kapil Sibal taking over from Mr A. Raja.

Action taken so far: The DoT has already issued show cause notices to 85 licencees for not meeting the eligibility criteria for the UAS licences. It has also issued notices to 119 licencees for not meeting the rollout obligations. A committee made up of a former judge of the Supreme Court of India has also been set up to understand the procedures that the DoT followed while allocating spectrum over the years.

Our view on the likely regulatory changes: We believe that the Government is in the process of formulating a forward looking new telecom policy. We expect: (1) the Government to charge one-time fees for excess spectrum held by operators beyond 6.2MHz; (2) the cancellation of ineligible licences; (3) the re-pricing of UAS licences given in 2008; and (4) the re-pricing of spectrum given to dual technology service providers. In our view, this re-pricing of licences is very important as it will increase the Government’s ability to charge a market determined rate for all future transactions.

Financial impact on listed players: Based on the above-mentioned thesis we estimate the financial impact on account of excess spectrum held by operators to be: Bharti Airtel (Rs43.4bn, Rs11.5/share), Idea Cellular (Rs13.5bn, Rs4.1/share) and RCom (Rs256mn, Rs0.12/share). The re-pricing of UAS licences given in 2008 will have the following impact: (1) Bharti Airtel (nil), Idea Cellular (Rs43.9bn, Rs13.3/sh) and RCom (Rs74bn, Rs36/sh).

Key recommendations: Amidst all this regulatory uncertainty, our analysis suggests that Bharti is better placed to withstand the impact of the potential liability. This coupled with strong fundamentals and a potential turnaround in its Africa operations makes Bharti the best play in the sector. We maintain our BUY on the stock. In contrast, we expect the contingent liabilities on account of re-pricing of the spectrum given in 2008, to weigh heavily on Idea and RCom. We reiterate our SELL recommendations on both stocks.