Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
2G spectrum pricing report – from known unknown to better known known.
TRAI has submitted a report to the DoT on ‘market prices’ of 2G spectrum. We note
that these prices, if accepted by the DoT, would be used to determine (1) the one-time
levy on operators holding more than 6.2 MHz of 2G spectrum, and (2) spectrum fee on
renewal for all operators, adjusted for inflation. While noting that these are still just
recommendations and subject to DoT’s acceptance, we estimate the total NPV hit (onetime
+ renewal) of Rs33/share for Bharti, Rs25/share for Idea, and Rs16/share for
RCOM. Remain Cautious.
Background to the spectrum pricing report
The Telecom Regulatory Authority of India (TRAI), in its May 11, 2010 recommendations to the
Department of Telecommunications on ‘Spectrum management and licensing framework’ had
recommended a one-time excess-spectrum levy on operators holding more than 6.2 MHz of 2G
GSM spectrum and charging a market-linked spectrum price on license renewals. The TRAI had
then suggested using the auction-determined 3G spectrum price as the base market price for the
computation of these charges, while also stating that it would initiate a separate study on
determining the ‘current market price of 2G spectrum’. The new report is the outcome of this
study. The TRAI had appointed four academicians from reputed engineering and management
institutes in India to undertake the spectrum pricing exercise.
Key highlights from the report
The study suggests differential pricing for spectrum up to 6.2 MHz and spectrum beyond 6.2
MHz. Prices have been determined per MHz of spectrum for a period of 20 years. Exhibit 1
depicts the spectrum ‘market price’ suggested for the two buckets.
It suggests using the determined market price of spectrum for (1) one-time spectrum levy on
spectrum beyond 6.2 MHz using April 1, 2010 as the base date; this charge would be
applicable on a prorated basis from April 1, 2010 till the end-date of license validity in various
circles for various operators, and (2) spectrum charge on license renewals – note that the report
clearly marks the determined prices as 2010 prices and suggests an inflation adjustment at the
time of renewal. Exhibit 2 depicts the current GSM license validity for the listed players.
Determined market prices for up to 6.2Mhz spectrum are 53% of the auction-determined 3G
spectrum price on a per MHz basis; for beyond 6.2 MHz, it is 136% of the 3G price. This clearly
reflects the experts’ view that the marginal spectral efficiency or commercial value of 2G
spectrum beyond 6.2 MHz is higher than the value of 3G spectrum. This is logical given the
coverage advantage that 3G spectrum provides over 3G; higher quantum of 2G spectrum
compensates for the 2G capacity disadvantage.
Interestingly, the TRAI’s letter to the DoT mentions 6.2 MHz as the contracted spectrum. From
the letter ‘the report determines the value of 1800 MHz spectrum in two tranches—price of
contracted spectrum, i.e. up to 6.2 MHz and price of incremental spectrum, i.e. beyond 6.2
MHz’. We note that the recent Justice Shivraj Patil Committee report on issues around grant of
2G licenses/spectrum mentions 4.4 MHz as the contracted spectrum and beyond that as excess.
We note that while the report talks about the ‘value of spectrum in the 1800 MHz band’,
presence of 900 MHz spectrum in the system has been baked into the computations.
Differences from TRAI’s May 2010 recommendations
Use of independently determined fair value of 2G spectrum instead of using the auctiondetermined
3G spectrum prices as a proxy for the same.
Determination of a blended spectrum price per MHz – the May 2010 recommendations
had suggested using the 3G price as the base and making adjustments for (1) spectrum in
the 900 MHz band, and (2) spectrum beyond 8 MHz.
Remaining validity of the license to be used for computation of pro-rated levy for excess
spectrum held. The earlier recommendations had suggested using a minimum period of 7
years in case the remaining license validity was less than 7 years.
Impact – one-time short-term, and recurring long-term
Even as the one-time levy for excess spectrum for operators holding >6.2 MHz spectrum in
various circles works out to be a substantial number (3% of CMP for Bharti, 5% of CMP for
Idea, meaty sums for BSNL, MTNL, Vodafone, and Aircel as well), we would advise focusing
on the long-term recurring impact of these recommendations. Essentially, the operators
would now need to pay spectrum charges on every license renewal. Current 2G licenses for
various operators come up for renewal starting CY2014 (see Exhibit 2 for circle-wise license
validity of listed players). We note that while the current licenses have an extended 20 year
validity, licenses would be renewed for a period of 10 years in the future – meaning a
recurring spectrum payment for operators every 10 years.
Exhibits 3 and 4 depict our computation of the one-time levy for excess spectrum on Bharti
and Idea, respectively. For Bharti, we estimate a liability of Rs36.7 bn or Rs10/share, while
for Idea, the same works out to Rs13.3 bn or Rs4/share. Note that the excess spectrum levy
on RCOM is a negligible Rs0.8 bn.
Exhibits 5, 5, and 7 depict our computation of the NPV impact of spectrum renewal charges
on Bharti, Idea, and RCOM respectively. We estimate a per share impact of Rs24 for Bharti,
Rs21 for Idea, and Rs16 for RCOM. We note that (1) we have assumed the differential
pricing structure as suggested for spectrum up to 6.2 MHz and spectrum beyond, (2) we
have assumed that TRAI’s recommendations on maximum spectrum to be allocated are
accepted – TRAI had recommended a maximum spectrum allocation of 10 MHz in
Mumbai/Delhi and 8 MHz in other circles; we have assumed that any excess spectrum
beyond these levels is returned, (3) we have assumed that the operators do not return any
2G spectrum at the time of renewal; we note that the operators may choose to do so if the
cost-benefit analysis is unfavorable and (4) we have made the inflation adjustment as per
recommendations.
The two (one-time levy and renewal charges) have an NPV impact of (1) Rs33/share
for Bharti (10% of CMP), (2) Rs16/share for RCOM (17% of CMP), and (3) Rs25/share
for Idea (37% of CMP).
Regulatory uncertainty of a few areas still remains
We note that the new report on spectrum pricing is just a recommendation from TRAI to
DoT and has to be ratified by the DoT to become a regulation.
In addition, there are a few more areas where regulatory uncertainty remains, the key ones
being – (1) M&A regulations, (2) spectrum re-farming, (3) changes to revenue share
mechanism on annual spectrum and license charges, and (4) license fee applicability for
towercos and VAS players. We also note that the recent 2G spectrum allocation
investigation involving new players is a separate issue. This may lead to cancellation of a few
licenses and more spectrum could become available. The recent report suggests a 2G
spectrum auction in circles where enough spectrum becomes available.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
2G spectrum pricing report – from known unknown to better known known.
TRAI has submitted a report to the DoT on ‘market prices’ of 2G spectrum. We note
that these prices, if accepted by the DoT, would be used to determine (1) the one-time
levy on operators holding more than 6.2 MHz of 2G spectrum, and (2) spectrum fee on
renewal for all operators, adjusted for inflation. While noting that these are still just
recommendations and subject to DoT’s acceptance, we estimate the total NPV hit (onetime
+ renewal) of Rs33/share for Bharti, Rs25/share for Idea, and Rs16/share for
RCOM. Remain Cautious.
Background to the spectrum pricing report
The Telecom Regulatory Authority of India (TRAI), in its May 11, 2010 recommendations to the
Department of Telecommunications on ‘Spectrum management and licensing framework’ had
recommended a one-time excess-spectrum levy on operators holding more than 6.2 MHz of 2G
GSM spectrum and charging a market-linked spectrum price on license renewals. The TRAI had
then suggested using the auction-determined 3G spectrum price as the base market price for the
computation of these charges, while also stating that it would initiate a separate study on
determining the ‘current market price of 2G spectrum’. The new report is the outcome of this
study. The TRAI had appointed four academicians from reputed engineering and management
institutes in India to undertake the spectrum pricing exercise.
Key highlights from the report
The study suggests differential pricing for spectrum up to 6.2 MHz and spectrum beyond 6.2
MHz. Prices have been determined per MHz of spectrum for a period of 20 years. Exhibit 1
depicts the spectrum ‘market price’ suggested for the two buckets.
It suggests using the determined market price of spectrum for (1) one-time spectrum levy on
spectrum beyond 6.2 MHz using April 1, 2010 as the base date; this charge would be
applicable on a prorated basis from April 1, 2010 till the end-date of license validity in various
circles for various operators, and (2) spectrum charge on license renewals – note that the report
clearly marks the determined prices as 2010 prices and suggests an inflation adjustment at the
time of renewal. Exhibit 2 depicts the current GSM license validity for the listed players.
Determined market prices for up to 6.2Mhz spectrum are 53% of the auction-determined 3G
spectrum price on a per MHz basis; for beyond 6.2 MHz, it is 136% of the 3G price. This clearly
reflects the experts’ view that the marginal spectral efficiency or commercial value of 2G
spectrum beyond 6.2 MHz is higher than the value of 3G spectrum. This is logical given the
coverage advantage that 3G spectrum provides over 3G; higher quantum of 2G spectrum
compensates for the 2G capacity disadvantage.
Interestingly, the TRAI’s letter to the DoT mentions 6.2 MHz as the contracted spectrum. From
the letter ‘the report determines the value of 1800 MHz spectrum in two tranches—price of
contracted spectrum, i.e. up to 6.2 MHz and price of incremental spectrum, i.e. beyond 6.2
MHz’. We note that the recent Justice Shivraj Patil Committee report on issues around grant of
2G licenses/spectrum mentions 4.4 MHz as the contracted spectrum and beyond that as excess.
We note that while the report talks about the ‘value of spectrum in the 1800 MHz band’,
presence of 900 MHz spectrum in the system has been baked into the computations.
Differences from TRAI’s May 2010 recommendations
Use of independently determined fair value of 2G spectrum instead of using the auctiondetermined
3G spectrum prices as a proxy for the same.
Determination of a blended spectrum price per MHz – the May 2010 recommendations
had suggested using the 3G price as the base and making adjustments for (1) spectrum in
the 900 MHz band, and (2) spectrum beyond 8 MHz.
Remaining validity of the license to be used for computation of pro-rated levy for excess
spectrum held. The earlier recommendations had suggested using a minimum period of 7
years in case the remaining license validity was less than 7 years.
Impact – one-time short-term, and recurring long-term
Even as the one-time levy for excess spectrum for operators holding >6.2 MHz spectrum in
various circles works out to be a substantial number (3% of CMP for Bharti, 5% of CMP for
Idea, meaty sums for BSNL, MTNL, Vodafone, and Aircel as well), we would advise focusing
on the long-term recurring impact of these recommendations. Essentially, the operators
would now need to pay spectrum charges on every license renewal. Current 2G licenses for
various operators come up for renewal starting CY2014 (see Exhibit 2 for circle-wise license
validity of listed players). We note that while the current licenses have an extended 20 year
validity, licenses would be renewed for a period of 10 years in the future – meaning a
recurring spectrum payment for operators every 10 years.
Exhibits 3 and 4 depict our computation of the one-time levy for excess spectrum on Bharti
and Idea, respectively. For Bharti, we estimate a liability of Rs36.7 bn or Rs10/share, while
for Idea, the same works out to Rs13.3 bn or Rs4/share. Note that the excess spectrum levy
on RCOM is a negligible Rs0.8 bn.
Exhibits 5, 5, and 7 depict our computation of the NPV impact of spectrum renewal charges
on Bharti, Idea, and RCOM respectively. We estimate a per share impact of Rs24 for Bharti,
Rs21 for Idea, and Rs16 for RCOM. We note that (1) we have assumed the differential
pricing structure as suggested for spectrum up to 6.2 MHz and spectrum beyond, (2) we
have assumed that TRAI’s recommendations on maximum spectrum to be allocated are
accepted – TRAI had recommended a maximum spectrum allocation of 10 MHz in
Mumbai/Delhi and 8 MHz in other circles; we have assumed that any excess spectrum
beyond these levels is returned, (3) we have assumed that the operators do not return any
2G spectrum at the time of renewal; we note that the operators may choose to do so if the
cost-benefit analysis is unfavorable and (4) we have made the inflation adjustment as per
recommendations.
The two (one-time levy and renewal charges) have an NPV impact of (1) Rs33/share
for Bharti (10% of CMP), (2) Rs16/share for RCOM (17% of CMP), and (3) Rs25/share
for Idea (37% of CMP).
Regulatory uncertainty of a few areas still remains
We note that the new report on spectrum pricing is just a recommendation from TRAI to
DoT and has to be ratified by the DoT to become a regulation.
In addition, there are a few more areas where regulatory uncertainty remains, the key ones
being – (1) M&A regulations, (2) spectrum re-farming, (3) changes to revenue share
mechanism on annual spectrum and license charges, and (4) license fee applicability for
towercos and VAS players. We also note that the recent 2G spectrum allocation
investigation involving new players is a separate issue. This may lead to cancellation of a few
licenses and more spectrum could become available. The recent report suggests a 2G
spectrum auction in circles where enough spectrum becomes available.
No comments:
Post a Comment