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While operators are trying to outdo each other to bag critical spectrum, the slowdown in bidding intensity translated into three-seven per cent gains for telecom stocks on Tuesday. Idea and Reliance Communications (RCom) had lost five-seven per cent earlier on concerns that the bidding would increase leverage. The premium for the 900 MHz band is coming off, with prices on the fifth day of auction witnessing an average increase of 1.7 per cent over the previous day.
Analysts say Idea Cellular will need to spend Rs 22,000 crore — 74 per cent more than the reserve price — to secure 5 MHz in the 900 MHz band in circles where its licences are coming for renewal in FY16. Thus, Idea is most at risk, as these circles contribute 70 per cent of its revenues. For RCom, the cost of renewing 5 MHz is pegged at Rs 6,000 crore, 87 per cent more than the reserve price. However, only 25-33 per cent of total payout needs to be done initially, with the rest in 10 equal instalments (after a two-year moratorium).
So far, the bidding is 10-12 per cent higher than analysts’ expectations of 1.5 to 1.6 times, with bids in the 900 MHz band at 1.75 times the reserve price.
While Idea has acquired 1800 MHz spectrum in seven of the nine circles coming for renewal, the 900 MHz circles offer better network quality and connectivity, leading to premium subscribers and better pricing/margins.
Elara’s analysts say switching to 1800 MHz will lead to higher capex and doubling of network operating costs impacting margins. The downside of the higher payouts for spectrum retention is Idea’s enterprise value/Ebitda will move to seven times FY16 estimates from five times, indicating costly stock valuations.
Rates are expected to rise after the auction, which along with an uptick in data revenues and sector consolidation, will offset some pressure on cash flows. Thus, most analysts continue to have a ‘buy’ on both Bharti and Idea with a target price of Rs 414 and Rs 188, respectively, for analysts polled on or after March 5. For RCom, analysts remain bearish. Bharti Airtel is not seen impacted much, as it had bagged spectrum in 1800 MHz in the previous auction and has fewer circles coming for renewal.
