Why Goldman Sachs downgraded Idea, RCom

Telecom companies might be in for more trouble. At a time that the department of telecommunications (DoT) might accept Trai’s recommendations on spectrum pricing, Goldman Sachs sees more regulatory pressures tightening around the telecom players.

In its latest report, Goldman Sachs downgraded Idea Cellular to neutral and Reliance Communications into Sell. The research firm says R Comm is most vulnerable to the regulatory policy changes while Bharti is better positioned among them. But GS has lowered the target price for all three of them.

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Media reports suggest that Trai may suggest even higher spectrum prices than that recommended by DoT. Though nothing is finalised as yet, it is clear that telcos will have to shell out more money both for buying and renewing spectrum.

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GS says such a scenario would likely raise questions on the viability of the business models for most of the operators. It thus expects the telcos to challenge such a decision in the courts. This will only add to the uncertainty in the stock performance which is now being price into the new targets.

Therefore they now say Bharti, Idea and R Comm could replace their own 900 Mhz with 1800 Mhz spectrum. But the full regulatory impact, they say, could be even higher.

R Comm it says will be hit the hardest as it has the highest spectrum after BSNL which could impact 34 percent of its implied value. This impact could be far lower at 10 percent for Bharti and 28 percent for Idea. But if R Comm does not rebid for the renewal of spectrum it could suffer even more as currently it is not spending mucha s capital expenditure and is mostly dependent on its existing spectrum.

But since Bharti’s licenses were not cancelled, it will not be affected in the short term. In the long term it would be impacted due to license renewal. But GS says, even after factoring in a regulatory impact of Rs44/share, the target price of Rs 360 offers 22 percent upside from current levels.

GS’ target price for Idea is Rs 80 and Rs 5o for R Comm.