India Equity Research: Telecom - Policy guidelines - No surprises, marginally positive

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India Telecom Minister Mr. Kapil Sibal has outlined some guidelines as part of the National Telecom Policy in a press conference. Most of the recommendations made by the TRAI have been accepted. There are marginal positives though including the auction prices to be used for imposing excess spectrum charges as against the TRAI prescribed pricing and the decision to impose license fee on towercos being deferred.

Key guidelines are:

· Excess spectrum fees – The Minister indicated that TRAI will come up with guidelines as ordered by the Supreme Court, implying that auction prices would be used for imposing excess spectrum fees as against a TRAI prescribed price. In our view, auction prices are likely to be lower than the one offered by TRAI hence this is a positive. We estimate that the negative impact of excess spectrum fees based on TRAI pricing on DCF of Bharti at INR13 per share and Idea at INR6.

· Spectrum re-farming - Approved in-principle, but will issue guidelines later on.

· Uniform license fees – To impose a uniform license fee of 8% of revenues. This would add INR8 to Bharti’s DCF and INR7 to that of Idea. TRAI had recommended a phased reduction to 6%, but DoT wanted it at 8%. No surprises.

· Spectrum cap prescribed – The quantum of spectrum an operator can hold is capped at 10MHz for Delhi and Mumbai, and 8MHz for rest of India. But the operator can acquire more spectrum through auctions and M&A. Bharti has 10MHz spectrum in Andhra Pradesh and Karnataka, and 9.2 MHz in Tamil Nadu and Bihar. No implication is seen since it would have paid charges for excess spectrum at the auction prices. Instead, it would have to surrender this now and win it back in auctions. This is based on TRAI recommendations.

· M&A guidelines - Automatic approval for merger between operators with a combined market share of up to 35% subject to a restriction that the merged entity cannot hold more than 25% of the spectrum allotted in that circle. If it does, it would have to surrender the incremental spectrum within one year of the merger. DoT would await detailed guidelines from TRAI for approving mergers leading to market share between 35%-60%. The DoT was earlier against mergers that resulted in a market share of over 35%.

· Spectrum sharing - To be permitted only between operators who possess spectrum in circles. Spectrum leasing and trading will not be permitted though. Again, like in M&A, spectrum sharing will not be allowed between operators who already have 25% of the allotted spectrum in a circle. Sharing of 3G spectrum would not be permitted either. Since the current case is pending with the TDSAT, we believe, this would be more applicable to futureallotments. This is in line with TRAI recommendation and would lead to a reduction in cash outflow for spectrum.

· License fee on tower cos – Decision deferred for a later date. License fees on tower cos at 8% of revenues would reduce the DCF of Bharti by INR10 per share and of Idea by INR3 per share.

EdelFlash: Telecom - Policy guidelines – No surprises, marginally positive