Telecom - TRAI recommendations: Refarming timeline advanced; sector update : Edelweiss PDF link

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TRAI has released its recommendations on spectrum auction. While it stuck to its earlier view of linking 2G spectrum prices to 3G pricing, it changed its recommendation by proposing to refarm 900MHz spectrum immediately instead of on licence expiry earlier. It has offered a reprieve to operators by lowering spectrum usage charge to 1% of revenue from the current slab structure. Overall, TRAI recommended spectrum prices, in our view, will elicit poor response in auctions. 

  

TRAI sticks to its guns on spectrum pricing

TRAI has recommended that spectrum in the 900MHz band should be priced at 2x the 3G final bid price and in the 1800MHz band at 1.08x. Thus, an operator bidding for pan-India 5MHz spectrum in the 1800MHz band will incur INR181bn as the base price. Also, it has recommended that the final bid price of every auction will be the base price for subsequent auction.      

Spectrum refarming advanced

The telecom authority has changed its earlier recommendation on refarming of spectrum in the 900MHz band and advanced it. It had earlier recommended that refarming should be done on licence renewal i.e., at various points of time in different circles as and when the licence expires. But, now it has recommended that auctions for 900MHz be conducted by H1FY14 and refarming be completed in all circles for all operators before November 2014, when first licence comes up for renewal in the industry. The incremental impact of this on Bharti Airtel (Bharti) compared to the earlier recommendation will be INR32/share and INR19/ share on Idea Cellular (Idea).    

Some reprieve provided

TRAI has also provided some reprieve to operators by announcing a deferred payment of the spectrum acquired through auctions over 10 years and capping the spectrum usage charge at 1% of revenue instead of a minimum of 3% currently. The deferred payment will lead to about 30% lower cost of spectrum on the base price given the time value of money. The lower spectrum usage charge will lead to a benefit of INR22 per share for Bharti and INR18 per share for Idea.

  

Outlook: Competitive intensity to moderate; prefer Bharti

The recommendations on spectrum auction and pricing have created an incremental negative impact of INR10 per share for Bharti and INR6 per share for Idea compared to the impact computed on licence renewal. Thus, the impact of policy changes on Bharti is INR76 per share, which needs to be adjusted from its DCF price of INR470 and the impact on Idea is INR44 per share, which needs to be adjusted from its DCF price of INR96. Operators like Telenor, which intend to participate in auctions, will find it difficult to get the desired start up spectrum of about 4MHz and even that will come at a significantly higher price. Hence, competitive intensity is expected to moderate. Thus, we maintain BUY on Bharti and prefer it over Idea.     

Telecom - TRAI recommendations: Refarming timeline advanced; sector update

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