Telecom
India
Whose money is it anyway? The telecom minister’s recent suggestion that the reserve
price for the upcoming spectrum auction would be based on a ‘revenue maximization’
motive is a sharp deviation from policy priorities stated in the draft NTP-2011 released
in Oct 2011. Draft NTP-2011 had clearly referred to ‘direct revenue generation’ as a
secondary policy objective. Amid all the objection to the TRAI-suggested reserve price in
the public domain, we keep hearing unconfirmed stories of operators (including
incumbents) preparing for bidding in the upcoming auctions at those very reserve price
levels. The outcome could be ‘customers losing some, shareholders a lot’ if the TRAIsuggested reserve prices end up becoming base spectrum price levels.
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link: http://www.kotaksecurities.com/pdf/indiadaily/indiadaily20072012mk.pdf
Latest EGoM meeting asks TRAI to present matrices on Government receipts and tariff impact
In the latest EGoM meeting (of the many that have taken place already – we have lost count) on
the issue on July 18, the EGoM asked the DoT to prepare a couple of matrices on the impact of
various combinations of 1,800 MHz spectrum reserve prices (between Rs120 bn and Rs180 bn for
a 5 MHz block) and spectrum usage charges (SUC; between 3% and 8% of AGR) on (1) net
present value of Government receipts – spectrum payouts are lump-sum one-time receipts while
SUC is a recurring receipt for the Government, and (2) tariff impact on customers.
The DoT will likely use the latest model, prepared by TRAI, to construct ‘the matrix’ (an apt term –
reminds us of the 1999 sci-fi thriller: The regulatory environment in the Indian telecom sector has
been no less of a thriller in the recent past), we presume; we have a few reservations with the
model like understated capital employed, a disregard for the current industry woes (the fact that
industry needs substantial tariff hikes even without additional spectrum cost burden to get to
reasonable RoCE levels), and opaque cost assumptions. However, our reservations do not matter.
A burdensome combination of reserve price and SUC looks certain; industry response critical
As mentioned in our May 25, 2012 note, we believe the industry cannot absorb (pass on to
customers) the incremental impact of TRAI-suggested reserve prices. This is due to two key
sobering realities:
` Stiff competition with no signs of struggling challengers in the market ‘losing hope’: The recent
news about Telenor seeking relaxation of ECB norms to fund its India venture to participate in
upcoming auctions is just one such example. Hope has been the dope that has attracted some
serious risk capital into the industry over the past few years and despite weaker-than-envisaged
business cases (in our view), we do not see signs of any of the challengers letting up.
Competitive dynamics would be particularly damaging to hopes of a ‘regulatory
burden pass-through’ if extant spectrum repricing does not take place concurrently for
all the operators. An ‘at-the-time-of-renewal’ repricing would place some of the challengers
(like RCOM, TTSL, and Aircel) better from a timing perspective than the incumbents that face a
material repricing burden several years ahead of challengers. Challengers could look at utilizing
the timing advantage as an opportunity to gain market share (by not raising tariffs) if the
incumbents look to pass on the burden. Incumbents, aware of this risk, would tread with
caution. Game theory, at its best: Good for customers, pretty bad for the shareholders.
` Tariff hikes beyond a point are more than likely to trigger negative elasticity, which would force
operators to tread the line very, very cautiously, in our view. Elasticity is not an issue for modest
tariff changes, but will be an issue for a change beyond modest (which is what is required).
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