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Business News/ Market / Mark-to-market/  Uncertainty over spectrum auction weighs on telecom stocks
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Uncertainty over spectrum auction weighs on telecom stocks

Shares of Bharti Airtel and Idea have fallen by 12.4% and 17%, respectively, from their highs in end-November

One of the concerns for investors has been the upcoming spectrum auction and the likelihood of another round of high bids. Photo: MintPremium
One of the concerns for investors has been the upcoming spectrum auction and the likelihood of another round of high bids. Photo: Mint

Shares of Bharti Airtel Ltd and Idea Cellular Ltd have fallen by 12.4% and 17%, respectively, from their highs in end-November. One of the concerns for investors has been the upcoming spectrum auction and the likelihood of another round of high bids. The government’s official stance, thus far, has suggested that it still sees the auction as a revenue maximization tool, even though Telecom Regulatory Authority of India (Trai) has explicitly warned that this approach can set the industry back by a few years.

News reports now suggest that the Telecom Commission has recommended raising the base price for the auction by 23% in the 900 MHz band, compared with what Trai had recommended. This shouldn’t matter much, as large telecom companies were expected to bid higher in any case. The key, of course, is if the defence ministry vacates some of its spectrum in the 2100 MHz band and this is made available in the auction.

While news reports suggest this is likely to happen, there is no official word on this yet. Additional supply will ensure companies don’t go haywire with their bids. As it is, it looks like companies with weak balance sheets will not be able to participate meaningfully. Analysts at Nomura Research said in a recent note to clients that while Bharti Airtel’s officials feel high spectrum prices will be a challenge, they also added in the same breath that it would deter many others with weaker balance sheets. But while large companies with balance sheet strength should be able to easily afford spectrum purchases, they too are likely to end up with a sizeable dent in their finances.

Still, the incumbents are in a sweet spot currently, with competition having weakened considerably. As a result, they have had far greater control on pricing. Now, with the drop in crude prices and the resultant drop in fuel costs, telecom companies should witness some cost savings as well. Analysts at Citigroup Research wrote in a note to clients, “Diesel prices have fallen 10% since 30 September. Given that energy costs are a pass-through, this fall should benefit Bharti (India wireless) & stand-alone Idea Ebitda margins by 30-40 basis points in the December quarter."

Despite all this, telecom stocks have remained under pressure although things could change if the government confirms the increase in the amount of spectrum that will be auctioned.

Mark to Market writers do not have positions in the companies they have discussed here.

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Published: 10 Dec 2014, 05:59 PM IST
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