Improving fundamentals
After
a horrendous period of the previous four years or so, the
fundamentals of the telecommunications (telecom) sector
finally witnessed a mild resurgence owing to a reduction in
the competitive intensity. Most major operators, such as
Bharti Airtel (Bharti), Idea Cellular (Idea) and Vodafone
India (Vodafone), raised their voice rates in the select
circles and also undertook an across the board tariff hike
for 2G data, indicating a return of pricing power. The tepid
response to the November 2012 auction also provided a much needed
sentiment boost to the telecom sector, which was already reeling
from a huge debt burden. The forthcoming March 2013 spectrum
auction should also witness a similar response, at least
for the sale of spectrum in the 1,800-MHz band, indicating a
lower cash outflow for the telecom companies.
Key developments
- Telcos served with a demand of one-time spectrum fee: The telecom companies (telcos) were served notices demanding payment of one-time spectrum fee. Consequently, most companies dragged the government to the court and obtained a stay on the decision.
- 4G licence holders permitted to offer voice services: The Telecom Commission permitted players with a broadband wireless access (BWA) license (4G service) to provide voice services under the unified licence regime. The BWA license holders would be permitted to offer voice services to customers by paying an additional Rs1,658 crore for a pan-India licence. The development increases the possibility of Reliance Industries Ltd (RIL) entering the voice telephony space, thus raising the risk of emerging as a disruptive force in the industry.
- Supreme Court orders unsuccessful bidders in November 2012 auction to cease operations: The Supreme Court ordered the telecom companies that were unsuccessful in winning the fresh 2G spectrum in November 2012 auction or those that did not participate in the auction process to immediately cease operations. The ruling led to players like Uninor shutting operations in Mumbai.
Outlook and valuation:
The recent months have witnessed a substantial decline in
competitive intensity providing the telecom players with
elbow room to increase tariffs and reduce discount and
freebies. We believe that the era of cut-throat tariff war
is over. Moreover, most of the overhangs such as the issue of
one-time spectrum fee have been factored in by the market. In view
of the improving fundamentals, we maintain our positive bias on
the telecom sector and prefer Bharti owing to its
leadership position in the Indian telecom market.
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