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Event: The Comptroller and Auditor General (CAG) of India has released its findings
on audit of issue of licences and allocation of 2G spectrum. The report has
highlighted that the 2G licence and spectrum was sold at a significant discount to the
fair price. Besides the below-fair-value sale, the report also alleges suppression and
misrepresentation of facts by several players, including Unitech (UT).
Impact: While the situation is likely to evolve with players (including UT) contesting
CAG’s claims, we note that UT has the highest stake in retaining the licence. This is
because its telecom venture, Uninor, is the only player that has rolled out a nationwide
network having garnered ~11.3 mn pan-India subscribers as of September
2010.
We believe two broad scenarios may pan out from here: a) cancellation of the
telecom licence and spectrum allocation; or b) imposition of a penalty to the extent
of presumed undervaluation of the spectrum, which we believe is more likely.
However, the process of arriving at a ‘fair value’ of spectrum is likely to be a much
debated affair with methodologies varying from benchmarking to 3G auction prices,
earlier offers, valuation of existing deals or newly market discovered price. It is also
likely that the entire excess payment (if any) may be borne by UT, if in its deal with
Telenor the company brought in the licence and spectrum at its own cost as its
contribution to the enterprise.
This potentially negative development was preceded by news of exercise of possible
put option by Lehman (the existence of the put was not denied by UT) and by the
split between UT and Omkar for several redevelopment projects in Mumbai.
Uninor is part of UT Infra (proposed to be demerged). We had earlier valued UT’s
32.75% stake in Uninor at INR 21.6 bn (INR 8/share). We have put our rating on the
stock ‘Under Review’. We will release a detailed note shortly.
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