Friday, February 3, 2012

>TELECOM SECTOR: Incumbents to gain from Apex Court verdict; Supreme Court scraps 122 licenses

Supreme Court of India ordered the cancellation of 122 licenses granted post Jan 2008 to companies following irregularities in issuing licenses and spectrum on first cum first served basis. Further to scrapping of licenses, a fresh auction for licenses is to be held in the next four months after the regulator formulates a new license policy and spectrum auction mechanism. Though the government is expected to come up with a new policy, we believe, it will be beneficial for Bharti Airtel and Idea Cellular and neutral for RCom. Out top pick remains Bharti Airtel in the present environment.

 Supreme Court scraps 122 licenses: Supreme Court of India ordered the cancellation of 122 licenses granted post Jan 2008 to companies on irregularities in issuing licenses and spectrum on first cum first served basis. In addition, the apex court asked Unitech, Etisalat DB and Tata to pay Rs50mn as penalty, whereas Loop, Sistema Shyam, Allianz and S-Tel have been directed to pay Rs 5mn as penalty for violating norms.

 Room for new operators: Among the operators whose licenses have been cancelled, Uninor, Sistema, S-Tele and Videocon had made significant investments. Given the options, we believe that Uninor and Sistema may participate in the new auctions to retain their presence in the country given their subscriber base and investments made in rolling out services.

 Our View: We believe that Bharti and Vodafone will benefit the most given that this may lead to reduction in intensity of competition that could lead to improving revenue per minutes. Also, a reduction in the number players and availability of spectrum would mean lesser aggression in the acquisition of spectrum in the auction mechanism. Idea will also gain in its existing 13 circles, but will be participating in the new policy to get back licenses for 7 circles. Given the current environment, we prefer Bharti Airtel the most followed by Idea Cellular in the listed space. We believe that opertors will benefit from tariff hike on RPM as incoming/outgoing call ratio can turn in their favour. However, we will also be looking at tower tenancy and its impact. We will be working on our assumptions to capture the impact of the verdict on incumbents.