No buyer bells for telecom? Here's what's behind it

Not very many things are going right for the telecom sector these days. Far-reaching regulatory changes, intense price wars and too many players have several brokerages wary of the once high-flying sector.

The latest to join the list was Credit Suisse, which downgraded Bharti Airtel to “neutral” and Idea to “underperform”. Earnings estimates for the next year were also slashed for both companies.

The research firm said the chances of the Telecom Regulatory Authority of India’s recommendations being accepted were fairly high and would force incumbent telecom players to give in to the demands of a cash-strapped government.

[caption id=“attachment_150977” align=“alignleft” width=“380” caption=“Reuters”]  [/caption]

It said the top challenges telecom companies will face because of changing regulations include a possible one-time regulatory fees for all those having more than 6.2 megahertz of spectrum; charging of fees from older players during the renewal of licences; the end of roaming charges; the release of more GSM spectrum and auction of 700 megahertz bandwidth with certain riders; and slashing mobile termination rates to 10 paise from 20 paise.

More from Business

Hyundai India’s Rs 27,870 crore IPO oversubscribed by 2.28X, largely driven by institutional investors How Indian fintech startups are driving Malaysia’s UPI-like digital payments revolution

All the measures imply either hefty payments by existing players or loss of revenues, Credit Suisse said.In fact, the payment of fees for a license for extra spectrum could cost them a significant portion of their market capitalisation.

Another problem for the sector is the weak rupee, the report said. Credit Suisse said nearly 60 percent of the cash-flow benefit from the recent tariff hikes had been wiped out due to the rupee depreciation due to foreign loans on their books.

The brokerage said that while the pricing power in the 2G voice market remained significant for companies, it remains to be seen whether that would be enough to offset the headwinds facing the sector.

Impact Shorts

More Shorts

Tata Harrier EV vs Mahindra XEV 9e: Design and road presence compared

As Trump weaponises tariff, Fed sees a bigger worry: Not jobs, but rising prices in America

In addition, even the new merger norms might not help existing players, as_Firstpost_already pointed out earlier, although they could benefit new entrants like Reliance Industries when it re-enters the sector.

Some other brokerages have a similarly glum view on the sector. In a report, Deutsche Bank said that while revenues could grow at 15-16 percent, policy shifts could be a major negative for telecom companies.The costs of excess spectrum and licence extensions are estimated at Rs 4,300 crore and Rs 5,700 crore for Bharti and Rs 1,900 crore and Rs 4,600 crore for Idea, respectively.

Investors, meanwhile, reacted negatively to Credit Suisse’s report. Bharti Airtel’s shares are down 2.76 percent, while Idea lost 4.2 percent.