Failed auctions lift telco prospects
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A combination of the failed 2G auctions and what Bharti Airtel (India and South Asia) CEO Sanjay Kapoor calls the beginning of telecom consolidation "in the real sense" has seen most telecom stocks rise over the past few days, as well as some re-rating by select brokerages. Others point to a general improvement of sentiment, though they remain wary of making firm projections until there is some more clarity in terms of by how much the government will lower the reserve price for spectrum in circles like Delhi, Mumbai, Karnataka and Rajasthan, which collectively account for 51% of the total pan-Indian reserve price of R14,000 crore per 5 MHz of spectrum. While telecom minister Kapil Sibal has said the empowered group of ministers (EGoM) will examine lowering the reserve price in order to get another round of bidding before the end of the financial year, he hasn't indicated how large this may be.
At least two broking houses have raised their target prices for leading telcos like Bharti Airtel and Idea Cellular following the failed 2G auctions where the government got less than a third of the expected price — against R28,000 crore that could have been got for GSM spectrum at the base price of R14,000 crore, the government got just R9,400 crore. While BofA Merrill Lynch upgraded Bharti and Idea to 'buy' from 'neutral', Kotak Institutional Equities has raised its target price for Bharti from R300 per share to R325, from R90 to R101 for Idea and from R43 to R50 for Reliance Communications.
There are several reasons for the optimism, starting with the likely impact of the failed auctions. Most brokerages built in a cut in the reserve prices, something reiterated by Sibal on Friday. This is critical because the reserve price will determine the price of the 'extra' spectrum as well as the cost of spectrum when licences are renewed — Bharti Airtel's metro licences, for instance, come up for renewal in 2014. The cost of 'extra' spectrum is approximately R30,000 crore but could fall to R20,000 crore if the base price is cut by a third, say, from R14,000 crore per 5 MHz in the recently-concluded auction. If the base price is cut by a third, according to Kotak estimates, this could reduce the drag on the Bharti stock by around R7 or so — Kotak estimates the total drag due to the 'extra' spectrum costs for Bharti at R22.