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Telecom
India
Draft NTP throws only broad contours; little in terms of specifics or timelines.
Even as Draft NTP 2011 (DNTP11) provided some clarity on the Government’s
directional stance on issues like spectrum management, licensing, roaming etc., it
provided little in terms of specifics or timelines – a damp squib of sorts in light of the
pre-draft excitement on the Street. Formulation of indicated Spectrum Act and TRAI-led
recommendation process on licensing issues, as suggested in the policy document,
could be long-drawn affairs. We remain constructive on Bharti/ Idea.
Broad contours, little clarity; overhang remains
DNTP11, while touching on a variety of issues like licensing framework, one-nation one-license,
license-spectrum de-linking, market-based spectrum pricing, spectrum pooling/sharing/trading,
spectrum refarming, free roaming, exit policy for telcos, infrastructure status for the Telecom
sector, etc., failed to provide any specifics and/or timelines. Relatively better clarity emerged on the
DoT’s stance on roaming – it wants the industry to move towards free roaming. Nonetheless, here
too, the path remains hazy – it was not clear whether abolition of roaming charges would follow
the migration to one-nation, one-license framework or implemented as a standalone regulation.
Issues around spectrum management and pricing have been left to be addressed by a separate
Spectrum Act, while the DoT intends to seek TRAI recommendations on issues around licensing
framework. Both of these, Spectrum Act formulation and TRAI recommendation process, could be
long-drawn affairs – wait for regulatory clarity has just gotten longer, overhang remains.
Directional stance towards a simplistic regulatory structure
�� Licensing framework – (1) de-linkage of license and spectrum, (2) only two categories of
operators – network service operator (spectrum/technology-neutral license) and service delivery
operator (service-neutral license), and (3) one-nation, one-license framework. The first category
of operators, i.e. NSOs, will be licensed to set up and maintain networks; they would need to
provide these networks on a non-exclusive basis (this sounds like Open Access, though
we seek more clarity). The second category, i.e. SDOs, would be licensed to provide any type
of telecom service; essentially no separate wireline, wireless, NLD, ILD, ISP or other licenses.
Only pan-India licenses will be issued and spectrum will have to be leased separately. However,
the policy document was unclear on whether spectrum grants would continue to be done at a
circle-level or issued only pan-India. We presume spectrum grants would remain at a circle level.
Also, the document talks about seeking recommendations from the TRAI on migration to onelicense
framework and other licensing issues.
�� Spectrum management/ pricing – the policy document had absolutely no specifics on this
area. It instead talks about enacting a separate Spectrum Act which would deal with all
spectrum-related issues like spectrum grant, pricing, refarming, sharing, trading, withdrawal,
etc. The policy did shed some light on the DoT’s directional stance on some of these issues – (1)
future spectrum grants to be based on market-linked prices; we do note that the policy
document does not define ‘market-linked’ nor does it talk about any retrospective charges for
past spectrum grants, (2) the DoT would ‘encourage’ spectrum refarming – the policy
document offers nothing further on the exact mechanics or timelines, (3) spectrum
pooling/sharing would be allowed and spectrum trading may be allowed at a later date, (4)
periodic spectrum audits to be conducted, and (5) 300 MHz of additional spectrum to be made
available to the industry by 2017 and another 200 MHz by 2020.
�� The entire telecom sector to be granted ‘infrastructure’ status – this would potentially
translate into tax benefits as well as open up a few new sources of financing for the
sector.
�� M&A regulations – the policy was surprisingly completely silent on this one barring a
mention of ‘framing an appropriate exit policy’ for licensees. We are unsure what this
really means or what such a policy would entail.
�� Policy specified certain rural tele-density (60% by 2017 and 100% by 2020) and BB subs
(175 mn by 2017 and 600 mn by 2020) targets. The Telecom Minister also made a
remark on potential ‘right to broadband’ for the citizens of the country.
�� Regulatory levies – the draft document stated that the DoT would look to rationalize taxes
and levies affecting the sector; whether this translates into a lower uniform license fees
for the sector was not clear. The Telecom Minister, in the press conference, did
mention that “revenue generation for the Government would be a secondary
objective (of the policy)”.
Free roaming – timing/ path unclear, ceteris paribus impact substantial
We now look at the impact of the only definitive policy directive mentioned in the draft, i.e.
a move towards free roaming. Our understanding of this is that free roaming would
essentially mean free ‘home network’ roaming and not free ‘any network’ roaming. With
this assumption, we note the following
�� Ceteris paribus, the fair value impact of free roaming works out to Rs28/share for Bharti,
Rs12/share for Idea and Rs7/share for RCOM. FY2013E EPS impact would be 9% on
Bharti, 22% on Idea, and 30% on RCOM. We base our computations on TRAI-disclosed
data on roaming contribution to revenues and our assumptions on potential % loss
within this revenue stream.
�� Even as the extent may vary, roaming abolition likely hits all players in the industry. That
the industry would pass on some of the impact in the form of higher pricing cannot be
ruled out.
�� Even as abolition of roaming premium appears to be more negative for incumbents (who
presumably 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. A counter-argument
to this could be that a bulk of such frequent roaming (presumably high-ARPU) subs would
likely be with the incumbents already and hence market share gain potential is limited.
�� Abolition of roaming may also drive usage elasticity on roaming outgoing minutes.
Sector impact – little in immediate term; wait and watch continues. We remain
positive on incumbents
As mentioned above, DNTP11 did not provide sufficient details in terms of specifics and
timelines on various policy measures to assess impact on the industry and individual players.
We have quantified the impact of free roaming earlier. Impact of other events remains to be
seen – as also mentioned above, the Spectrum Act enactment and TRAI recommendation
process on ‘one-license framework’ could be long-drawn affairs. We continue to believe that
in the ‘regulatory risks versus pricing power’ tussle, we believe the incumbents have
sufficient pricing power in the near-to-medium term to mitigate some of the regulatory
headwinds. We remain constructive on Bharti and Idea.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Draft NTP throws only broad contours; little in terms of specifics or timelines.
Even as Draft NTP 2011 (DNTP11) provided some clarity on the Government’s
directional stance on issues like spectrum management, licensing, roaming etc., it
provided little in terms of specifics or timelines – a damp squib of sorts in light of the
pre-draft excitement on the Street. Formulation of indicated Spectrum Act and TRAI-led
recommendation process on licensing issues, as suggested in the policy document,
could be long-drawn affairs. We remain constructive on Bharti/ Idea.
Broad contours, little clarity; overhang remains
DNTP11, while touching on a variety of issues like licensing framework, one-nation one-license,
license-spectrum de-linking, market-based spectrum pricing, spectrum pooling/sharing/trading,
spectrum refarming, free roaming, exit policy for telcos, infrastructure status for the Telecom
sector, etc., failed to provide any specifics and/or timelines. Relatively better clarity emerged on the
DoT’s stance on roaming – it wants the industry to move towards free roaming. Nonetheless, here
too, the path remains hazy – it was not clear whether abolition of roaming charges would follow
the migration to one-nation, one-license framework or implemented as a standalone regulation.
Issues around spectrum management and pricing have been left to be addressed by a separate
Spectrum Act, while the DoT intends to seek TRAI recommendations on issues around licensing
framework. Both of these, Spectrum Act formulation and TRAI recommendation process, could be
long-drawn affairs – wait for regulatory clarity has just gotten longer, overhang remains.
Directional stance towards a simplistic regulatory structure
�� Licensing framework – (1) de-linkage of license and spectrum, (2) only two categories of
operators – network service operator (spectrum/technology-neutral license) and service delivery
operator (service-neutral license), and (3) one-nation, one-license framework. The first category
of operators, i.e. NSOs, will be licensed to set up and maintain networks; they would need to
provide these networks on a non-exclusive basis (this sounds like Open Access, though
we seek more clarity). The second category, i.e. SDOs, would be licensed to provide any type
of telecom service; essentially no separate wireline, wireless, NLD, ILD, ISP or other licenses.
Only pan-India licenses will be issued and spectrum will have to be leased separately. However,
the policy document was unclear on whether spectrum grants would continue to be done at a
circle-level or issued only pan-India. We presume spectrum grants would remain at a circle level.
Also, the document talks about seeking recommendations from the TRAI on migration to onelicense
framework and other licensing issues.
�� Spectrum management/ pricing – the policy document had absolutely no specifics on this
area. It instead talks about enacting a separate Spectrum Act which would deal with all
spectrum-related issues like spectrum grant, pricing, refarming, sharing, trading, withdrawal,
etc. The policy did shed some light on the DoT’s directional stance on some of these issues – (1)
future spectrum grants to be based on market-linked prices; we do note that the policy
document does not define ‘market-linked’ nor does it talk about any retrospective charges for
past spectrum grants, (2) the DoT would ‘encourage’ spectrum refarming – the policy
document offers nothing further on the exact mechanics or timelines, (3) spectrum
pooling/sharing would be allowed and spectrum trading may be allowed at a later date, (4)
periodic spectrum audits to be conducted, and (5) 300 MHz of additional spectrum to be made
available to the industry by 2017 and another 200 MHz by 2020.
�� The entire telecom sector to be granted ‘infrastructure’ status – this would potentially
translate into tax benefits as well as open up a few new sources of financing for the
sector.
�� M&A regulations – the policy was surprisingly completely silent on this one barring a
mention of ‘framing an appropriate exit policy’ for licensees. We are unsure what this
really means or what such a policy would entail.
�� Policy specified certain rural tele-density (60% by 2017 and 100% by 2020) and BB subs
(175 mn by 2017 and 600 mn by 2020) targets. The Telecom Minister also made a
remark on potential ‘right to broadband’ for the citizens of the country.
�� Regulatory levies – the draft document stated that the DoT would look to rationalize taxes
and levies affecting the sector; whether this translates into a lower uniform license fees
for the sector was not clear. The Telecom Minister, in the press conference, did
mention that “revenue generation for the Government would be a secondary
objective (of the policy)”.
Free roaming – timing/ path unclear, ceteris paribus impact substantial
We now look at the impact of the only definitive policy directive mentioned in the draft, i.e.
a move towards free roaming. Our understanding of this is that free roaming would
essentially mean free ‘home network’ roaming and not free ‘any network’ roaming. With
this assumption, we note the following
�� Ceteris paribus, the fair value impact of free roaming works out to Rs28/share for Bharti,
Rs12/share for Idea and Rs7/share for RCOM. FY2013E EPS impact would be 9% on
Bharti, 22% on Idea, and 30% on RCOM. We base our computations on TRAI-disclosed
data on roaming contribution to revenues and our assumptions on potential % loss
within this revenue stream.
�� Even as the extent may vary, roaming abolition likely hits all players in the industry. That
the industry would pass on some of the impact in the form of higher pricing cannot be
ruled out.
�� Even as abolition of roaming premium appears to be more negative for incumbents (who
presumably 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. A counter-argument
to this could be that a bulk of such frequent roaming (presumably high-ARPU) subs would
likely be with the incumbents already and hence market share gain potential is limited.
�� Abolition of roaming may also drive usage elasticity on roaming outgoing minutes.
Sector impact – little in immediate term; wait and watch continues. We remain
positive on incumbents
As mentioned above, DNTP11 did not provide sufficient details in terms of specifics and
timelines on various policy measures to assess impact on the industry and individual players.
We have quantified the impact of free roaming earlier. Impact of other events remains to be
seen – as also mentioned above, the Spectrum Act enactment and TRAI recommendation
process on ‘one-license framework’ could be long-drawn affairs. We continue to believe that
in the ‘regulatory risks versus pricing power’ tussle, we believe the incumbents have
sufficient pricing power in the near-to-medium term to mitigate some of the regulatory
headwinds. We remain constructive on Bharti and Idea.
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