Tuesday, June 15, 2010

>INDIAN WIRELESS SECTOR: BWA auctions ended with three major negative consequences

BWA auctions ended with three major negative consequences for the alreadybeleaguered
Indian telecom sector. First, the pan-India winning price of Rs128.47bn (US$2.74bn) per slot was well ahead of anyone’s expectations. Second, it led to a fractured verdict, with the largest incumbents coming out croppers with no circle wins, except for Bharti, which won in only four circles. Lastly, in a repeat of 2003, we are seeing the birth of four new players in the Indian telco space. While one could dismiss their entry citing competition only for wireless data, this clearly thwarts the future growth option for incumbents from wireless data during the next five years. Of the four new entrants, most notable is Reliance Industries, India’s largest company, which began the remarkable telecom foray in 2003 of what is now called RCOM.

We are clear that one needs a serious reassessment of Indian telecoms, and the hope of consolidation to reduce the number of players to a workable seven or eight is just that – hope. We reiterate our Underperform ratings on the entire listed operator space – Bharti, RCOM, Idea, TCOM and MTNL. In our view, all of it is ‘dead money’ for the next six to nine months. We believe that the only event worth investing in may be RCOM attaining a cash infusion on the 26% stake sale at a good premium.

RCOM, Vodafone, Idea and Tata are notable absentees from the list of BWA spectrum winners. Aircel Maxis continued to surprise in BWA (as in 3G) with wins in eight circles. BSNL and MTNL have been allotted BWA spectrum in 20 and two circles, respectively (the third pan-India BWA slot).

The biggest surprise winner is Infotel Broadband, which won all 22 circles (pan-India) for US$2.74bn. Other surprise winners were QUALCOMM (QCOM US, US$35.03, Outperform, TP: US$50.00, Phil Cusick) in four circles, Tikona (unlisted) in five circles and Augere (unlisted) in
one circle.

Within hours of the BWA result release, Reliance Industries disclosed that it has acquired a 95% stake in Infotel Broadband by infusing approximately US$1.02bn and that RIL would pay US$2.74bn to the government for Infotel’s BWA spectrum. This marks the reentry of RIL into telecoms, and the fresh capital infusion would help Infotel launch its services targeted at corporates/ enterprises by next year. Although no capex plan has been disclosed, we believe that the size of RIL’s balance sheet (US$46.3bn) and its annual operating cashflow of US$4.4bn would be able to fund expansion in the scope and scale of the telecom business over time and a potential entry into the whole gamut of services, chiefly voice.

Headwinds galore for the incumbents, in-market consolidation a pipe dream unless regulations change; valuations expensive as downgrades start coming through: MNP implementation could occur by September 2010, which could lead to a 7–8% correction in ARPU, entirely led by postpaid. We view the regulatory framework on M&A as the key hurdle for inmarket consolidation, even while supply of new capacity continues unabated.

To read the full report: WIRELESS SECTOR