Our recent interactions with industry players, including infrastructure providers, COAI and a couple of telecom experts in Delhi indicate that smaller operators are losing momentum. There is broad understanding that auctions will be held in October-November 2012 and the industry seems to have given up hopes of a reduction in reserve price of spectrum in ensuing auctions. There is consensus that tariffs will rise post auctions as it is a business imperative. Participation by foreign players in auctions is still uncertain. Overall, we believe smaller operators are losing momentum due to the uncertainty, which augurs well for larger players. We continue to prefer Bharti Airtel (Bharti).
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Auctions likely by November; no respite in spectrum price expected
We spent a couple of days in Delhi interacting with smaller operators (Aircel, MTS and Uninor), COAI, towercos and a couple of telecom experts. The industry believes that auctions will be completed by October-November 2012, as indicated by DoT, since it will take a couple of months to conduct the auctions after the information memorandum is released on August 22, 2012. The industry also seems to have given up hopes of a downward revision in spectrum reserve price because of TRAI recommendation that reserve price of auction should be set at the same level as the final price in the previous auction and applying an inflation rate.
Smaller operators running out of steam
Smaller operators seem to be frustrated with the uncertainty surrounding spectrum auctions as it is impacting continuation of investment by their parent organisations. For Sistema, the dilemma is whether to continue with CDMA since only 2.5MHz is being offered to a new operator or participate in the ensuing auctions to acquire 1800MHz spectrum (GSM). If it acquires GSM spectrum, it will not be able to transfer its current CDMA subscribers and the company will have to start from scratch. In Aircel’s case, various media reports indicate that the foreign parent intends to sell and there has been exodus in the company’s top management with the exits of COO, Head of Strategy, Marketing and CTO .
Outlook: Competitive intensity to moderate; prefer Bharti
The mood amongst industry players seemed gloomy as the uncertainty of spectrum auction is beginning to impact their day-to-day operations. Also, the prolonged uncertainty will compel smaller operators to go slow on their investments. Thus, new players are in wait-and-watch mode. We believe, this augurs well for older operators as market share is shifting in their favour. Our preference for Bharti continues as we believe most negatives are discounted in the price, whereas upside from lower spectrum price (which will lead to lower payouts for spectrum) and tariff hikes are being viewed with scepticism. In Idea’s case, the Street is giving it the benefit of doubt by not discounting the regulatory impact entirely. Bharti remains our top pick in the sector.
Regards,
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