Spectrum auction and outlook for telecom stocks

Spectrum auction has brought focus back on stocks of telecom service providers.

According to reports, Sunil Mittal-controlled Bharti Airtel, Mukesh Ambani-owned Reliance Jio and Gautam Adani have collectively bid around 1.45 trillion rupees to buy 5G airwaves on the first day of India’s largest-ever spectrum auction that began on Tuesday.

The bidding and demand seen on the first day itself was 80 per cent higher than the government’s internal estimates of 80,000 crore rupees. 

According to a Jefferies' note, telcos may look at the 700 megahertz band more closely as it is the primary band for 5G globally.

It is available pan-India with its price is similar to the 800/900 megahertz bands; and got provisional bids worth 39,270 crore rupees on day-one of the auction.

The note also pointed out that the spectrum supply is nearly 20 times higher in 2022 as compared to 2021 - mainly on account of the 5G band auction availability.

Analysts say the spectrum spend by market leaders Reliance Jio and Bharti Airtel is significantly higher than expected, requiring the industry to grow faster in order to justify such large investments.

According to ICICI Securities, “Higher spectrum investment has been seen to depress the return on invested capital for the industry globally. We remain cautious on the higher investments by Indian telcos.”

However, Edelweiss Securities says that given the improving cash flows amid rising revenues from data, the telecom companies will be able to manage the annual payouts for spectrum. In a note to Business Standard, it says, “These bids translate into Rs 12,600 crore annual pay-out versus our expectation of Rs 8,430 crore. Considering strong and improving profitability, we do not see this as much of an issue.” 

At the bourses, Bharti Airtel and Vodafone Idea have underperformed and are currently trading below their respective 200-day moving averages, which indicates underlying weakness.

[Byte of Avdhut Bagkar, Business Standard]

On Thursday, the markets will react to the outcome of the US Federal Reserve’s decision on interest rates. Futures & options expiry of July series later in the day, too, will keep traders busy.