Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Policy pangs. The Draft New Telecom Policy (D-NTP 2011) is likely to be announced
today, Monday, October 10. Regulatory direction for several aspects of licensing,
spectrum, and M&A remains unclear. The forthcoming draft may or may not provide
definitive direction on these areas. Nonetheless, we would watch for directions on
(1) spectrum framework – pricing philosophy, future allocation guidelines, retrospective
charges, refarming etc., (2) licensing framework, especially wrt impact on roaming and
license fee structure, (3) M&A regulations, and (4) spectrum sharing/ trading.
Focus on relative impact, not absolute; expect a protracted process
Before we get into a detailed discussion of various aspects that the D-NTP 2011 may touch and
the potential impact of the same on the industry and various players, we would recommend that
investors
�� Focus on the relative impact, not absolute – incremental regulatory burden is likely to be
passed on the customers unless it impacts one segment of competition disproportionately
versus others – adverse developments on spectrum reframing and roaming fall under this
category as they impact incumbents disproportionately. It is also important to factor in various
players’ impact absorption capacity while assessing relative impact.
�� Expect a long drawn process ahead – for starters, what’s coming out is a draft policy – it
may not be comprehensive, may provide only directional answers not definitive ones that the
industry and the Street is seeking. We do not know if a consultative process with the industry
follows or not, but we do expect litigation and appeals to follow if the policy is over-burdening
the industry as a whole or any particular segment. As per press reports, the Telecom Minister is
targeting a final policy by Dec 2011, but this could be delayed, in our view.
�� We appreciate that a lot of regulatory decisions are likely to actually hit the players
over a longer timeframe, especially the ones around spectrum renewal pricing and refarming.
Farther the time of actual impact, higher would be the likelihood of the industry participants
taking pricing and cost actions to partially/completely mitigate the impact.
Key areas that D-NTP 2011 should, but may or may not, address
The current regulatory framework for the industry is a combination of NTP-99 and several
appendages (subsequent amendments and new notifications) on top of it. Several of these
amendments and/or notifications have arguably been arbitrary and do not sum up a coherent
regulatory framework. Many of these regulatory decisions have been questioned recently;
arguments for and against these decisions have been made, from causing loss to the exchequer to
distorting the level playing field in the industry, among others. This drove the need for a
comprehensive relook at the policy framework – D-NTP 2011 is the outcome of this re-look
process and is expected to serve as a policy framework for the future and (if possible) to also
correct some of the decisions made in the past.
Whether D-NTP 2011 delivers on these expectations and sets a clear and comprehensive regulatory
framework or not remains to be seen. Nonetheless, key areas for which we hope to see regulatory
direction include (1) spectrum framework – pricing philosophy, future allocation guidelines,
retrospective charges, refarming etc., (2) licensing framework, especially wrt impact on roaming
and license fee structure, (3) M&A regulations, and (4) spectrum sharing/ trading. We discuss each
of these and their impact on listed players in detail later in this note.
NTP 2011 needs to do a fine balancing job
The new policy needs to balance the interests of the three key stakeholders i.e. the
Governments (fiscal), the consumers, and the industry while correcting some of the decisions
of the past. The purpose of the policy should be to ensure (1) affordability of telecom
services to a wider segment of population (2) ‘right’ payout to the Government, and (3)
long-term sustainability of and healthy competition in the industry. NTP 2011 faces the
additional burden of correcting some of the arbitrary license/ spectrum allocation decisions
of the past.
The above is clearly a difficult challenge and more importantly, some of the decisions may
not be straight forward. Take, for example, spectrum refarming. This would involve taking
back 900 MHz spectrum, currently being used for 2G services, and re-auctioning the same
for deployment of new generation (3/3.5/4/…G) technologies.
There are arguments for and against refarming – the ‘for’ argument is essentially that 2G is
not the most optimal use of 900 MHz spectrum, a national resource; hence, this should be
taken back and redeployed or refarmed. A secondary benefit would be the revenues 900
MHz spectrum auction fetches the fiscal.
The ‘against’ argument is three-fold – (1) it causes major disruption to the incumbents’
operations and increases their cost of doing business; it could potentially make rural
operations unviable. Essentially, raising the cost table of the most efficient players in the
industry is bound to take the tariffs of basic voice services in the industry up, not the best
outcome for a country with only about 50% real tele-density, (2) best use of spectrum can
not just be defined as higher-generation services; country-specific factors need to be baked
into such decisions; argument for a higher-generation technology with higher data speeds
probably does not hold true in India, as yet, and (3) it is unfair to the incumbents whose
networks have been designed keeping 900 MHz spectrum in mind. Even as the last
argument may not find much acceptance, the one around viable rural rollouts merits
attention and the Government would need to balance the arguments ‘for’ and ‘against’
refarming.
We now discuss the potential areas that the NTP may touch and the impact on listed players.
Spectrum allocation and pricing – relative impact unclear
TRAI had made certain recommendations on 2G spectrum pricing, which 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. While noting that
these are still just recommendations and are subject to DoT’s acceptance, we estimate the
total NPV hit (one-time + renewal) of Rs35/share for Bharti, Rs28/share for Idea, and
Rs20/share for RCOM. We note that our computations are based on TRAI’s Feb 2011 pricing
recommendations. We see both these (excess spectrum charge and higher spectrum renewal
charge) near certainties; however, the quantum could be lower than recommended by TRAI.
We note that in addition to retrospective ‘excess’ spectrum charges (impacting incumbents)
and prospective spectrum charges on license renewal (impacting all players, but challengers
are better-off on time value of payouts), there is a possibility of retrospective spectrum
charges on all spectrum grants since 2001 – essentially to correct for the fact that
post-2001 start-up spectrum grants have been done at 2001 pricing. This could hit
some of the newer players (including RCOM and TTSL) hard.
Spectrum refarming – a serious relative negative for incumbents
TRAI had also recommended refarming 900 MHz GSM spectrum; refarming would involve
taking back 900 MHz spectrum from operators holding such spectrum (mostly incumbents)
and issuing them similar quantity of 1800 MHz GSM spectrum in lieu. This has substantial
capex and opex implications given the relatively inferior spectral characteristics of 1800 MHz
spectrum. Assuming this recommendation is accepted and implemented, we estimate an
NPV hit of Rs32/share on Bharti, Rs21/share on Idea, and marginal for RCOM.
Partial/ complete removal of roaming charges on home network – neutral, on
balance
Recent press reports suggest that the DoT is considering a change from the current 22-circle
structure for telecom licenses to a single pan-India license. This would mean an end to
‘outside home circle’ roaming charges (on incoming as well as outgoing calls, data usage
and outgoing SMS) as long as the subscriber remains on his service provider’s network. We
believe that the move has merit as there are very little incremental costs of access on
roaming if the subscriber is in the home (same operator’s) network. We also believe that
roaming premium charges (on ‘home’ network) are likely to be abolished over the
next 12 months, whether this aspect is touched by NTP or not.
We note that roaming charges contributed to 8.3% of GSM operators’ and 5% of CDMA
operators’ revenues for the Mar 2011 quarter as per TRAI reports. Complete abolition of
roaming charges would have a negative valuation impact of Rs28/share on Bharti Rs12/share
on Idea, and Rs7/share for RCOM (assuming implementation on April 1, 2012).
Even as abolition of roaming premium appears to be more negative for incumbents (who
presumable have a higher proportion of ‘roaming’ subs), we note that this may not
necessarily be the case. This is because roaming premium would still be applicable if a sub
moves out of his ‘home’ network i.e. to another operator’s network – this would place the
incumbents (with their network coverage leadership) better in the eyes of frequent
‘roaming’ subs and may result in a market share gain of such subs.
Further cut in termination rates – relatively more negative for incumbents
We do not see this area being discussed in the D-NTP 2011.
TRAI is in the middle of an interconnect regime review process – a consultation paper has
been floated and responses received from operators and other industry bodies. We note that
the last review of IUC charges by the TRAI in early CY2009 resulted in a 10 paise cut in
termination charges to 20 paise from 30. We do note that a cut in termination rates should
theoretically be EBITDA neutral (despite being revenue-negative) for large operators who
have broadly equal termination revenues and costs. The trouble is that cuts in termination
charges typically result in off-net call rate cuts by smaller operators – this may not be the
case this time around given that smaller operators are looking at means to shore up their
financials. Nonetheless, a 5 paise cut in termination rates, if passed on, has a negative
valuation impact of Rs22/share on Bharti, Rs13/share on Idea, and Rs8/share on RCOM.
Other areas – uniform license fees M&A regulations, exit policy, spectrum
sharing/trading
�� Uniform license fee could to be announced to prevent license fee arbitrage – the uniform
license fee level may settle anywhere between 6 and 10% - we believe it would set at
a level that would be revenue-neutral for the Government; so no major
beneficiaries or losers here among the wireless companies. ISPs and long distance players
could be hit.
�� M&A regulations – anti-monopoly regulations unlikely to be changed, in our view –
maximum permissible market share on subs/rev could remain at the current 40%. More
important would be any decision on maximum permissible spectrum holding post M&A
and any M&A-related regulatory levies. Even as M&A regulations have been a much
talked about and much anticipated piece of NTP 2011, we see M&A regulations as only a
hygiene factor – relaxed M&A norms are necessary for consolidation but that’s about it.
Market forces (a willing buyer and seller at a price) and not regulations, will drive
consolidation. As noted in several of our earlier notes, we do not see an industrystructure-
changing consolidation event in the near-term.
�� Exit policy for new players who have not rolled out yet – this may be addressed but
unlikely to be a relief to such companies.
�� Other areas – spectrum trading (unlikely to be allowed), spectrum sharing (may be
allowed selectively; for example, between two operators holding only start-up spectrum),
VAS companies and tower companies may be brought under the licensing regime.
Quantifying impact on Bharti, Idea, and RCOM
We summarize the potential regulatory headwinds and impact on Bharti, Idea, and RCOM
under various probabilistic scenarios below (Exhibits 1-3). We note that the probabilities
should be looked at as a combination of event occurrence and quantum. For example, a
50% probability of one-time excess spectrum charges can be seen as a 100% chance of the
event happening at 50% of TRAI-recommended spectrum pricing levels. Our base-case
probability estimates for various events are highlighted as shaded cells in the Exhibits – we
note that our base case depicts our best guess of probability/quantum combination at this
point – our models and/or fair value target prices for these stocks do not build any impact.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Policy pangs. The Draft New Telecom Policy (D-NTP 2011) is likely to be announced
today, Monday, October 10. Regulatory direction for several aspects of licensing,
spectrum, and M&A remains unclear. The forthcoming draft may or may not provide
definitive direction on these areas. Nonetheless, we would watch for directions on
(1) spectrum framework – pricing philosophy, future allocation guidelines, retrospective
charges, refarming etc., (2) licensing framework, especially wrt impact on roaming and
license fee structure, (3) M&A regulations, and (4) spectrum sharing/ trading.
Focus on relative impact, not absolute; expect a protracted process
Before we get into a detailed discussion of various aspects that the D-NTP 2011 may touch and
the potential impact of the same on the industry and various players, we would recommend that
investors
�� Focus on the relative impact, not absolute – incremental regulatory burden is likely to be
passed on the customers unless it impacts one segment of competition disproportionately
versus others – adverse developments on spectrum reframing and roaming fall under this
category as they impact incumbents disproportionately. It is also important to factor in various
players’ impact absorption capacity while assessing relative impact.
�� Expect a long drawn process ahead – for starters, what’s coming out is a draft policy – it
may not be comprehensive, may provide only directional answers not definitive ones that the
industry and the Street is seeking. We do not know if a consultative process with the industry
follows or not, but we do expect litigation and appeals to follow if the policy is over-burdening
the industry as a whole or any particular segment. As per press reports, the Telecom Minister is
targeting a final policy by Dec 2011, but this could be delayed, in our view.
�� We appreciate that a lot of regulatory decisions are likely to actually hit the players
over a longer timeframe, especially the ones around spectrum renewal pricing and refarming.
Farther the time of actual impact, higher would be the likelihood of the industry participants
taking pricing and cost actions to partially/completely mitigate the impact.
Key areas that D-NTP 2011 should, but may or may not, address
The current regulatory framework for the industry is a combination of NTP-99 and several
appendages (subsequent amendments and new notifications) on top of it. Several of these
amendments and/or notifications have arguably been arbitrary and do not sum up a coherent
regulatory framework. Many of these regulatory decisions have been questioned recently;
arguments for and against these decisions have been made, from causing loss to the exchequer to
distorting the level playing field in the industry, among others. This drove the need for a
comprehensive relook at the policy framework – D-NTP 2011 is the outcome of this re-look
process and is expected to serve as a policy framework for the future and (if possible) to also
correct some of the decisions made in the past.
Whether D-NTP 2011 delivers on these expectations and sets a clear and comprehensive regulatory
framework or not remains to be seen. Nonetheless, key areas for which we hope to see regulatory
direction include (1) spectrum framework – pricing philosophy, future allocation guidelines,
retrospective charges, refarming etc., (2) licensing framework, especially wrt impact on roaming
and license fee structure, (3) M&A regulations, and (4) spectrum sharing/ trading. We discuss each
of these and their impact on listed players in detail later in this note.
NTP 2011 needs to do a fine balancing job
The new policy needs to balance the interests of the three key stakeholders i.e. the
Governments (fiscal), the consumers, and the industry while correcting some of the decisions
of the past. The purpose of the policy should be to ensure (1) affordability of telecom
services to a wider segment of population (2) ‘right’ payout to the Government, and (3)
long-term sustainability of and healthy competition in the industry. NTP 2011 faces the
additional burden of correcting some of the arbitrary license/ spectrum allocation decisions
of the past.
The above is clearly a difficult challenge and more importantly, some of the decisions may
not be straight forward. Take, for example, spectrum refarming. This would involve taking
back 900 MHz spectrum, currently being used for 2G services, and re-auctioning the same
for deployment of new generation (3/3.5/4/…G) technologies.
There are arguments for and against refarming – the ‘for’ argument is essentially that 2G is
not the most optimal use of 900 MHz spectrum, a national resource; hence, this should be
taken back and redeployed or refarmed. A secondary benefit would be the revenues 900
MHz spectrum auction fetches the fiscal.
The ‘against’ argument is three-fold – (1) it causes major disruption to the incumbents’
operations and increases their cost of doing business; it could potentially make rural
operations unviable. Essentially, raising the cost table of the most efficient players in the
industry is bound to take the tariffs of basic voice services in the industry up, not the best
outcome for a country with only about 50% real tele-density, (2) best use of spectrum can
not just be defined as higher-generation services; country-specific factors need to be baked
into such decisions; argument for a higher-generation technology with higher data speeds
probably does not hold true in India, as yet, and (3) it is unfair to the incumbents whose
networks have been designed keeping 900 MHz spectrum in mind. Even as the last
argument may not find much acceptance, the one around viable rural rollouts merits
attention and the Government would need to balance the arguments ‘for’ and ‘against’
refarming.
We now discuss the potential areas that the NTP may touch and the impact on listed players.
Spectrum allocation and pricing – relative impact unclear
TRAI had made certain recommendations on 2G spectrum pricing, which 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. While noting that
these are still just recommendations and are subject to DoT’s acceptance, we estimate the
total NPV hit (one-time + renewal) of Rs35/share for Bharti, Rs28/share for Idea, and
Rs20/share for RCOM. We note that our computations are based on TRAI’s Feb 2011 pricing
recommendations. We see both these (excess spectrum charge and higher spectrum renewal
charge) near certainties; however, the quantum could be lower than recommended by TRAI.
We note that in addition to retrospective ‘excess’ spectrum charges (impacting incumbents)
and prospective spectrum charges on license renewal (impacting all players, but challengers
are better-off on time value of payouts), there is a possibility of retrospective spectrum
charges on all spectrum grants since 2001 – essentially to correct for the fact that
post-2001 start-up spectrum grants have been done at 2001 pricing. This could hit
some of the newer players (including RCOM and TTSL) hard.
Spectrum refarming – a serious relative negative for incumbents
TRAI had also recommended refarming 900 MHz GSM spectrum; refarming would involve
taking back 900 MHz spectrum from operators holding such spectrum (mostly incumbents)
and issuing them similar quantity of 1800 MHz GSM spectrum in lieu. This has substantial
capex and opex implications given the relatively inferior spectral characteristics of 1800 MHz
spectrum. Assuming this recommendation is accepted and implemented, we estimate an
NPV hit of Rs32/share on Bharti, Rs21/share on Idea, and marginal for RCOM.
Partial/ complete removal of roaming charges on home network – neutral, on
balance
Recent press reports suggest that the DoT is considering a change from the current 22-circle
structure for telecom licenses to a single pan-India license. This would mean an end to
‘outside home circle’ roaming charges (on incoming as well as outgoing calls, data usage
and outgoing SMS) as long as the subscriber remains on his service provider’s network. We
believe that the move has merit as there are very little incremental costs of access on
roaming if the subscriber is in the home (same operator’s) network. We also believe that
roaming premium charges (on ‘home’ network) are likely to be abolished over the
next 12 months, whether this aspect is touched by NTP or not.
We note that roaming charges contributed to 8.3% of GSM operators’ and 5% of CDMA
operators’ revenues for the Mar 2011 quarter as per TRAI reports. Complete abolition of
roaming charges would have a negative valuation impact of Rs28/share on Bharti Rs12/share
on Idea, and Rs7/share for RCOM (assuming implementation on April 1, 2012).
Even as abolition of roaming premium appears to be more negative for incumbents (who
presumable have a higher proportion of ‘roaming’ subs), we note that this may not
necessarily be the case. This is because roaming premium would still be applicable if a sub
moves out of his ‘home’ network i.e. to another operator’s network – this would place the
incumbents (with their network coverage leadership) better in the eyes of frequent
‘roaming’ subs and may result in a market share gain of such subs.
Further cut in termination rates – relatively more negative for incumbents
We do not see this area being discussed in the D-NTP 2011.
TRAI is in the middle of an interconnect regime review process – a consultation paper has
been floated and responses received from operators and other industry bodies. We note that
the last review of IUC charges by the TRAI in early CY2009 resulted in a 10 paise cut in
termination charges to 20 paise from 30. We do note that a cut in termination rates should
theoretically be EBITDA neutral (despite being revenue-negative) for large operators who
have broadly equal termination revenues and costs. The trouble is that cuts in termination
charges typically result in off-net call rate cuts by smaller operators – this may not be the
case this time around given that smaller operators are looking at means to shore up their
financials. Nonetheless, a 5 paise cut in termination rates, if passed on, has a negative
valuation impact of Rs22/share on Bharti, Rs13/share on Idea, and Rs8/share on RCOM.
Other areas – uniform license fees M&A regulations, exit policy, spectrum
sharing/trading
�� Uniform license fee could to be announced to prevent license fee arbitrage – the uniform
license fee level may settle anywhere between 6 and 10% - we believe it would set at
a level that would be revenue-neutral for the Government; so no major
beneficiaries or losers here among the wireless companies. ISPs and long distance players
could be hit.
�� M&A regulations – anti-monopoly regulations unlikely to be changed, in our view –
maximum permissible market share on subs/rev could remain at the current 40%. More
important would be any decision on maximum permissible spectrum holding post M&A
and any M&A-related regulatory levies. Even as M&A regulations have been a much
talked about and much anticipated piece of NTP 2011, we see M&A regulations as only a
hygiene factor – relaxed M&A norms are necessary for consolidation but that’s about it.
Market forces (a willing buyer and seller at a price) and not regulations, will drive
consolidation. As noted in several of our earlier notes, we do not see an industrystructure-
changing consolidation event in the near-term.
�� Exit policy for new players who have not rolled out yet – this may be addressed but
unlikely to be a relief to such companies.
�� Other areas – spectrum trading (unlikely to be allowed), spectrum sharing (may be
allowed selectively; for example, between two operators holding only start-up spectrum),
VAS companies and tower companies may be brought under the licensing regime.
Quantifying impact on Bharti, Idea, and RCOM
We summarize the potential regulatory headwinds and impact on Bharti, Idea, and RCOM
under various probabilistic scenarios below (Exhibits 1-3). We note that the probabilities
should be looked at as a combination of event occurrence and quantum. For example, a
50% probability of one-time excess spectrum charges can be seen as a 100% chance of the
event happening at 50% of TRAI-recommended spectrum pricing levels. Our base-case
probability estimates for various events are highlighted as shaded cells in the Exhibits – we
note that our base case depicts our best guess of probability/quantum combination at this
point – our models and/or fair value target prices for these stocks do not build any impact.
No comments:
Post a Comment