>TELECOM: No easy solution to the spectrum row

Uncertainty continues...
With only about two months remaining for the August 31, 2012 Supreme Court (SC) deadline of conducting the spectrum auction, things are pretty uncertain right now as the industry tries to reach a consensus on various contentious issues pertaining to reserve price of 2G spectrum, spectrum re-farming, one-time spectrum charges, spectrum liberalisation, etc. Also, the auctioneer for conducting the auction has not been finalised as yet. Even the presidential reference, through which the government was going to ask for SC’s advice on crucial matters relating to cancellation of licenses, is pending. To make matters worse, the EGoM on spectrum pricing has been left in a limbo with Pranab Mukherjee resigning from government to contest the presidential election. We believe it may be very difficult to meet the August 31 deadline. Moreover, no easy solution to the spectrum row is in sight since various stakeholders are acting from different view points.


Reserve price undecided…
Trai had come up with a pan-India reserve price of | 3622 crore for 1 MHz of spectrum. DoT, correcting Trai, has increased the reserve price to | 4245 crore. While the operators have protested against such a huge reserve price arguing that it could result in a tariff hike of 24-90 paisa, Trai is of the opinion that such a reserve price would only lead to a tariff hike of 3-6 paisa. Eventually, the Empowered Group of Ministers (EGoM) is going to decide on the reserve price. New operators will be hugely affected by huge reserve price as DB Etisalat, STel and Loop (excluding Mumbai) have decided to shut down their operations while Uninor and SSTL have made it clear that they would not participate in the auctions should the EGoM accept Trai’s recommendations on the reserve price.


Incumbents to pay prospectively…but how much?
Another uncertainty prevalent in the industry is whether operators should be charged one-time spectrum fees over the remaining life of the license to liberalise the spectrum or should it be liberalised as and when licenses come up for renewal. Also, the government is unclear on the amount of spectrum beyond which one-time spectrum fees should be imposed. According to media reports, it is evaluating three options to impose one time spectrum fees viz. 1) on the entire spectrum held by an operator, 2)beyond start-up spectrum of 4.4 MHz for GSM and 2.5 MHz for CDMA and 3) beyond contractual spectrum of 6.2 MHz for GSM and 5 MHz for CDMA. However, the liberalisation would happen only after the operator pays the auction discovered price of the spectrum it holds.


Valuation
Until further clarity emerges on the situation, we rate Bharti and Idea (due to a sharp correction in the stock) as BUY and RCom as HOLD in spite of the correction in the stock, due to higher sensitivity to regulatory risks.