Indian telecom sector in a coma

Moneylife Digital Team 10 October 2012

Telecom players are in a situation where neither can they shut operations easily nor they can survive due to uncertain regulatory environment. This is more like the famous dialogue of Ajit from a Bollywood film, “Dump this man in liquid oxygen. The liquid won’t let him survive, the oxygen won’t let him die”

The Indian telecom industry continues to face difficult times, courtesy changing policies and intense competition. On Monday, the Empowered Group of Ministers (EGoM) finalised its recommendations to impose a one-time fee on incumbent operators on spectrum in excess of 4.4MHz. With this step, the Indian government has moved one step closer on clarifying most of the issues related with spectrum pricing. However, brokerages are not too hopeful on any improvement in the telecom segment.

Terming the Indian telecom as “miserable landscape”, Nomura Equity Research, said it is very difficult to assess how the upcoming spectrum auctions would pan out in November. It said operators like MTS may consider bidding in just few circles similar to Uninor and also be open to merger and acquisition (M&A) sooner than later.

The EGoM decided to impose a one-time fee on incumbents for spectrum held in excess of 4.4MHz.The cut-off is lower than the earlier-anticipated 6.2Mhz. While the charge is largely on expected lines, the proposal of prospective implementation will limit payouts. The Cabinet is likely to approve this charge on 16th October.

“While this development is negative for the sector, it is a step ahead in terms of providing clarity on impending regulatory issues. This will lead to higher spectrum related payouts for the operators and note that the impact from the one-time fees is still likely to be much lower than the impact from license renewal related costs. Amidst a slowing growth environment, we remain cautious given the lack of tariff discipline, which remains the key to earnings recovery,” said Religare Capital Markets in a research note.

The declaration of spectrum auction, reserve price and clarity on excess spectrum is providing better visibility on major regulatory issues in the telecom sector. However, few major issues like spectrum refarming in 800/900MHz band and 3G roaming arrangements still remain unanswered. In addition, the resolution of each regulatory issue is leading to higher funding requirements for telecom operators at a time when their balance sheets are already stretched.

“We maintain a negative outlook on telecom stocks due to their stretched balance sheets, high regulatory costs and inability of operators to increase tariffs,” says BRICS Securities, in a research report.

Nomura also thinks that telecom operators are in a “tight spot” and even after the auction in November, the players may remain under pressure. “On M&A specifically, the landscape or permutations could become clearer after the auctions we think—elimination is as likely as consolidation. Also it is not a given that the market will become more rational post consolidation; in fact, competition could rise even as buyers also seek a return on acquisition investment too,” it added.

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