Tuesday, February 7, 2012

>INDIA WIRELESS: Government Giveth and SC Taketh Away

■ New entrants’ licenses cancelled – SC has today ruled cancelling of the 122 2G licenses issued on/after 10 Jan 08. The licensees include Uninor (22), Videocon (22), Loop (21), Sistema (21), Swan (13), Idea (9), S Tel (6), Spice (4) and Tata Tele (3). This should benefit incumbents with 1) likely traffic re-distribution, 2) lowering competition (esp Uninor, which was seeing operational improvement from its strategy of keeping low tariffs) and 3) increased uncertainty amongst new competition.

 Details - The ruling will become operational after four months during which time TRAI needs to make recos for grant of license and allocation of spectrum (through auction). The Govt will have one month to take a decision post this. The ruling doesn’t exclude operators whose licenses have been cancelled to participate in the re-auction though it is silent on return of license fees paid by them (Rs16.5bn for a pan-India license across 22 circles). In the meantime, operators can continue business as usual and also file a review petition in the SC.

 Who loses? – Uninor, which was seeing operational improvement while constraining incumbents from taking further hikes (keeping tariffs at disc), is most impacted amongst new entrants. The other new entrants had done a soft launch. The nine circles of Idea contribute ~4% of revs; 1% in the case of Tata Tele. Meanwhile the ruling doesn’t impact Bharti, Voda and RCOM.

 Setting of reserve price for auction is critical as well as challenging – Reserve price would be critical in deciding mkt structure, i.e. whether Telenor participates. Meanwhile, while market value of 2G should be lower than 3G given the lower no. of operators & higher spectrum availability, politically it may be challenging for the Govt to fix a reserve price lower than the 3G winning bid.

 What happens next? – Idea is likely to participate in the auction under almost any scenario. Assuming all other licensees exit and traffic gets re-distributed (bulk of new entrants’ subs are dual-SIM), Bharti’s, Idea’s and RCOM’s FY13E wireless EBITDA improves 4-7%. Idea will gain at the net level even after paying for spectrum at 3G prices. The sector would also benefit from better pricing power (Uninor should toe incumbents line given its B/S will get constrained if it decides to participate in auction/acquisition) - 1p increase in rev/min increases Bharti/Idea/RCOM’s FY13E wireless EBITDA by 6-9%. Meanwhile the auction price is likely to be used for calculation of excess spectrum charges and license renewals.

 We view these developments as structurally positive for the incumbents and sector due to 1) better pricing power (lower competition), 2) traffic re-distribution (reduction in multi-SIMs) and 3) higher visibility of 2G spectrum. Maintain Buys on Bharti, Idea and RCOM.

To read the full report: INDIA WIRELESS