Re: {LONGTERMINVESTORS} Telecom Services Sector .....Thread
Rajesh Desai
| Sharekhan Special [February 21, 2013] |
SHAREKHAN SPECIAL
Q3FY2013 Telecom earnings review
Improving fundamentals
After a horrendous period of the previous four years or so, the fundamentals of the telecommunications (telecom) sector finally witnessed a mild resurgence owing to a reduction in the competitive intensity. Most major operators, such as Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone India (Vodafone), raised their voice rates in the select circles and also undertook an across the board tariff hike for 2G data, indicating a return of pricing power. The tepid response to the November 2012 auction also provided a much needed sentiment boost to the telecom sector, which was already reeling from a huge debt burden. The forthcoming March 2013 spectrum auction should also witness a similar response, at least for the sale of spectrum in the 1,800-MHz band, indicating a lower cash outflow for the telecom companies.
Key developments
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Telcos served with a demand of one-time spectrum fee: The telecom companies (telcos) were served notices demanding payment of one-time spectrum fee. Consequently, most companies dragged the government to the court and obtained a stay on the decision.
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4G licence holders permitted to offer voice services: The Telecom Commission permitted players with a broadband wireless access (BWA) license (4G service) to provide voice services under the unified licence regime. The BWA license holders would be permitted to offer voice services to customers by paying an additional Rs1,658 crore for a pan-India licence. The development increases the possibility of Reliance Industries Ltd (RIL) entering the voice telephony space, thus raising the risk of emerging as a disruptive force in the industry.
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Supreme Court orders unsuccessful bidders in November 2012 auction to cease operations: The Supreme Court ordered the telecom companies that were unsuccessful in winning the fresh 2G spectrum in November 2012 auction or those that did not participate in the auction process to immediately cease operations. The ruling led to players like Uninor shutting operations in Mumbai.
Outlook and valuation: The recent months have witnessed a substantial decline in competitive intensity providing the telecom players with elbow room to increase tariffs and reduce discount and freebies. We believe that the era of cut-throat tariff war is over. Moreover, most of the overhangs such as the issue of one-time spectrum fee have been factored in by the market. In view of the improving fundamentals, we maintain our positive bias on the telecom sector and prefer Bharti owing to its leadership position in the Indian telecom market.
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| Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. |
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CA. Rajesh Desai
Rajesh Desai
Telecom stocks tumbled as the surprise decision of Reliance Industries (RIL) to join the bidding for upcoming telecom spectrum auction slated for 3 February 2014 raised concerns of aggressive bidding in the auction which in turn could have an adverse impact on balance sheet of telecom firms. Idea Cellular, Bharti Airtel and Reliance Communications were off 2.8% to 5.4%. Shares of RIL were up 0.25% at Rs 887.65.
RIL will join Bharti Airtel, Idea Cellular as well as the local units of Vodafone Group PLC and Telenor ASA in bidding for bandwidth in the auction in February. The government aims to raise at least Rs 11000 crore through two sets of auctions, one for a national service and another for a portion of bandwidth in Delhi, Mumbai or Kolkata, collectively home to over 32 million Indians.
RIL will bid to operate both nationally and in the three cities. A successful bid would mark the company's re-entry into the phone business after spinning-off its cellphone unit Reliance Communications in 2005, to brother Anil Ambani, as part of the division of the business empire built by their late father, Dhirubhai Ambani.
The auctions are crucial for Bharti and Vodafone India, whose bandwidth usage rights are set to expire in Delhi, Mumbai and Kolkata. Reliance Communications also has permits up for renewal in some regions in November this year. The companies will have to bid successfully in the upcoming auction to continue operations. The rights to use bandwidth last for 20 years. Idea Cellular and the Indian unit of Telenor, are also bidding in the hopes of expanding their services.
The Department of Telecommunications, which will conduct the auctions, will scrutinize the bids and announce the final list of bidders on 20 January 2014.
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CA. Rajesh Desai