New operators like Uninor (Telenor) and MTS (Sistema) will probably relook at whether they want to continue their India operations if TRAI’s latest recommendations on spectrum pricing are accepted, Kotak Institutional Equities has said.
For traditional big operators such as Bharti Airtel and Vodafone, the impact of the new prices would start from the year 2015 onwards, when they turn up to have their licenses renewed, it added. However, Idea will hit hard sooner.
The stocks of telecom companies have been hit after the telecom regulator recommended liberalization of spectrum enabling the launch of 3G/4G services on 2G spectra, but jacked up their prices to 3G levels.
Kotak said the recommendations, if accepted, would be “an inflection point and the industry could look markedly different in a few years” as operators trying to adjust to the new regime.
The immediate impact would be on Uninor and MTS — two of the new clutch of operators who have built successful businesses in India.
Unlike the other new operators such as Loop Telecom and Etisalat DB, the above two are keen on continuing their operations in India.
However, instead of the Rs 1,660 crore that they paid for spectrum four years ago, Uninor and MTS will have to shell out at least Rs 14,500 and Rs 18,100 crore respectively for about the same amount of spectrum under the new TRAI pricing.
The increase is about 8.7 times for Uninor and 11 times for MTS.
They are also higher than what the two have spent in total since entering India and may make it more tempting for them to simply shut shop.
Uninor will “likely need to revisit its stance on India given that the cost of staying in business is now likely higher than cost of shutting down operations,” Kotak said, adding that the higher cost will also impact Telenor’s search for a new India partner (who will have to share a quarter of expenses.)
Besides, it is not clear whether the government will allow to set off the price they had paid in 2008 against their new purchase.
That said, the operators have the option to retain only their most profitable operations and cut costs substantially. For example, Uninor has launched operations only in about 13 of the total 20 regions and is yet to start large-scale operations in others.
Where they have, MTS and Uninor have both built up subscriber-bases numbering in the millions and have strong brand recall for value-for-money telecom.
There is also a silver lining to the TRAI recommendations as far as the two new operators are concerned — the steep price tags are likely to prevent predatory behaviour by big operators like Bharti Airtel and Vodafone.
Uninor had asked that big operators, who already have considerable spectrum, be prevented from bidding in the upcoming auctions to prevent them from raising the prices unreasonably.
The high prices recommended by TRAI, however, are likely to keep away big operators.
Besides, unlike new operators, the big ones have to start worrying about how to pay steep prices for renewing their licenses when they start expiring from 2015 onwards.
“…cash flow hit for existing operators, if they do not participate in the auctions, starts only in FY2015, giving the industry reasonable time to usher in a new volume-pricing model,” Kotak noted.
In addition, they will have to re-plan and restructure their networks as they are forcibly evicted from the low-cost 900 MHz spectrum into higher cost 1800 MHz spectrum under TRAI’s refarming plans as their licenses are renewed.
“Idea Cellular will be the most impacted from spectrum re-farming given that the company generates most of its current EBITDA from its 900 MHz circles… In addition, the company faces immediate cash outflows from payouts for buying spectrum in the seven circles, where its licenses were cancelled by the recent SC judgment.
“Idea may choose to shut down operations in a few of these circles, even as we assume it bids for two blocks of 1.25 MHz in each of the seven circles as our base case,” Kotak noted.
Reliance Communications, which currently operates both CDMA and GSM services, may be forced to abandon its CDMA services if the TRAI recommendations are implemented.
“Sharp increase in cost of holding spectrum in the 800 MHz band could make the company revisit its dual-tech, dual-network strategy,” Kotak pointed out.
In addition, re-farming will hit the company’s traditional operations: GSM operations (Reliance Telecom) in eight old circles and CDMA/EVDO operations in all 22. “The company derives most of its EBITDA from these operations, in our view, and would be hit hard by re-farming,” Kotak noted.
