Telecom - Spectrum getting pricier; Edelweiss

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Excess spectrum pricier than before

On Feb 09, 2011, the Telecom Regulatory Authority of India (TRAI) released the report submitted by the spectrum committee (constituted to study the issue of valuing 2G spectrum in the 1800 MHz band). The committee has recommended price of 1800 MHz pan-India contracted spectrum at INR 17.7 bn/MHz (47% lower than 3G price) and excess spectrum at INR 45.7 bn/MHz (36% higher than 3G price). Based on the committee’s recommendation,Bharti Airtel (BHARTI) will incur a one-time cost of INR 40 bn (INR 10 per share) for excess spectrum (over 6.2 MHz) and Idea Cellular (Idea) INR 17.5 bn (INR 5 per share).

Impact bigger on renewal of license

The Street is focusing on the one-time impact of the fee on excess spectrum, but ignoring the impact of spectrum fee on renewal. The committee’s report computes value of spectrum separately for contracted spectrum (up to 6.2 MHz) and excess spectrum (> 6.2 MHz). The telecom minister, Mr. Kapil Sibal, in a recent press conference, stated that license and spectrum would be de-linked and that start-up spectrum would not be allotted free with the license. This leads us to believe that operators will have to pay spectrum fees on the entire quantum of spectrum allotted (and not just excess spectrum) at the time of license renewal. If so, BHARTI would incur INR 245 bn as total spectrum fee on renewal of license over the next 10 years, the PV of which is ~INR 123 bn (INR 33 per share). The impact on Idea is severe of INR 187 bn and PV is INR 91.6 bn (INR 28 per share).

Hint of spectrum re-farming

The incumbent operators (Bharti, Vodafone, Idea and BSNL/MTNL) possess spectrum in the 900MHz band. As the group has only recommended the pricing of spectrum in the 1800 MHz band, we believe, it seems to suggest that spectrum re-farming, as recommended by TRAI in May 2010, is likely to be implemented. Our analysis indicates that PV of the additional capex and opex due to spectrum re-farming for BHARTI will be INR 153 bn (INR 40 per share) and for Idea INR 98 bn (INR 30 per share).

Potential savings on licence fee and spectrum charges

TRAI had recommended uniform licence fee of 6% by 2014, while also calibrating the spectrum charges across spectrum slabs. We estimate the combined PV of savings due to lower license fees and change in spectrum fees to be INR 193 bn (INR 51 per share) for BHARTI and INR 98 bn (INR 30 per share) for Idea.

Outlook: Severe impact on cash flows likely; we remain cautious

TRAI, in its letter to the Department of Telecom (DoT), suggested that the government could consider auctioning spectrum, which will be released on cancellation of a few licenses, and that price be considered for future allotment. In our view, most of the incumbent operators have enough spectrum (due to 3G); hence, participation in the auction could be limited. This could impact the price realised by the government unless it sets a high base price. We remain cautious on the sector as the impact of spectrum pricing on cash flows could be severe if the recommendations are accepted, adding to operators’ woes due to MNP and 3G related pressure on business.