Trai spectrum grenade will cripple telecom, say experts

New Delhi: The telecom sector has been thrown into uncertain times, say analysts, by the Telecom Regulatory Authority of India’s (TRAI) recommendations on spectrum auction.

Most of them are unanimous in their opinion that high spectrum prices will deter widespread participation in fresh auctions, especially by those telcos whose licenses were cancelled by the Supreme Court and who want to participate in fresh auctions.

The regulator has proposed a pan-India spectrum renewal fee of about Rs 3,600 crore for a 5Mhz block, which is about 8 percent higher than even the pan-India 3G spectrum block.

Along similar lines, TRAI has suggested a reserve price of Rs 14,500 crore for 700Mhz auctions likely over the next two years.

HSBC analysts Rajiv Sharma, Tucker Grinnan and Upasna Agarwal noted that these recommendations hold little logic and that there may not be widespread participation in fresh auctions at such high prices. “We believe the government will have to significantly revisit the pricing recommendations from TRAI. We believe these recommendations have the potential to delay spectrum auctions and likely to add to the uncertainty of impacted new entrants,” they said in a note to clients.

Ganesh Duvvuri of Edelweiss Securities pointed out that players like Telenor, who lost licenses and intended to participate in fresh auctions, “will find it difficult to get the desired start-up spectrum of about 4MHz and even that will come at a significantly higher price”. He said competitive intensity in the telecom market is expected to moderate. Leading telcos have already indicated that with lesser competition and higher costs of operation, tariffs are likely to go up in the near future.

On how each major telco will be impacted if the government accepts TRAI recommendations as they are, MF Global has estimated that Reliance Communications and Vodafone will be the biggest losers. “We estimate that implementation of reserve price will impact RCOM and Vodafone to the tune of Rs 524 billion (Rs 254/share) and Rs 494 billion respectively on net present value (NPV) basis. Bharti and Idea will be impacted by Rs 473 billion (Rs 124/share) and Rs 298 billion (Rs 90/share) respectively,” it said.

Edelweiss’ Duvvuri said the incremental negative impact for Bharti would be Rs 10 per share, whereas for Idea, it would be Rs 6 per share.

Analysts are also cut up about TRAI’s suggestion that 900 mhz band spectrum be immediately refarmed - which means existing telcos will have to surrender whatever spectrum they hold in this band and then bid anew in fresh auctions. HSBC’s analysts said that “with TRAI building a strong case for the development of ecosystem in 1,800 Mhz bands for LTE, we fail to understand the need for spectrum re-farming.

“Separately, we don’t see a business case for new entrants acquiring the re-farmed 900 Mhz spectrum either, given that the pan-India payout will be at Rs 7,600 crore, excluding any capex.”

So, the ball is now in Telecom Minister Kapil Sibal’s court. The government has to take a call on whether TRAI’s pricing is sustainable, and if its recommendations indeed leave room for new telcos to once again participate in the Indian telecom market.