Stock Market

Spectrum sharing: Will marginal players take exit route?

After the government approved spectrum sharing between telecom companies to tackle the issue of spectrum shortage, there has been a lot of talk on whether this can lead to consolidation in the sector. The move will allow bigger players to now acquire additional or new spectrum.

Ratings agency India Ratings and Research believes this can lead to the emergence of just four pan-India players. “The industry could see emergence of four pan-India players ( Bharti Airtel , Vodafone India, Idea Cellular and Reliance Jio Infocomm), assuming they will retain spectrum in all licensed service areas (LSAs), while other players may maintain strategic regional presence by trading their spectrum holding in some LSAs,” he report said.

Currently, there are eleven telecom operators in India, including marginal players such as MTS India, Videocon and MTNL , with market share of less than one percent, respectively.

According to the India Ratings report, spectrum trading will also help unlock funds stuck in the form of unutilised spectrum.

Indian telecom companies are some of most spectrum-starved operators in entire Asia Pacific. Consumers or customers frequently experience call drops and poor data quality.

Fitch Ratings too believes it will benefit the top three players. It says market leader Bharti Airtel, Idea Cellular and Vodafone, have increased their combined revenue market share to 73 percent. “These companies may further consolidate market share by acquiring additional spectrum from smaller telcos, de-congest their network, and support their fast-growing 3G/4G services. Furthermore, their ability to trade spectrum may curtail excessive bidding in future spectrum auctions,” the report said.

“We believe that smaller telecom companies now have an option to exit from this industry. That way the industry will gradually consolidate and the revenue market share will come gradually to the top three telecom companies,” Nitin Soni of Fitch Ratings said in an earlier interview on CNBC-TV18.

Soni added that government-owned MTNL and BSNL are the biggest ones with lots of spectrum in 900 megahertz that can readily be traded or shared. “I am not sure how much they will share or trade that spectrum. BSNL has a good chunk of 900 megahertz which is under-utilised and which is very important for let us say Bharti Airtel or Vodafone. Then Tata, Aircel and Videocon also have important spectrum assets. Aircel has a lot of 3G spectrum which obviously they are not making EBITDA profits, so that can be monetised to get additional revenues,” he said.

Both BSNL and MTNL post operating losses as employee costs are 50 percent of revenue. Furthermore, they have high debt, which was taken on to fund the acquisition of spectrum reserved for them by the government.

Additionally, the Fitch report also stated that the new rules are credit positive for the fourth-largest telco — Reliance Communications Limited (Rcom, BB-/Stable) — which can now reduce leverage (debt) through monetising its under-utilised pan-India 800MHz spectrum. Reliance Jio has spectrum in 800 megahertz in 10 circles and Reliance Communication has a continuous spectrum in that band.

In the absence of friendly mergers and acquisition rules, Bank of America Merrill Lynch too sees these norms as a positive for the industry. It broadly agrees with the views of Fitch Ratings.

Post spectrum trading, BofA-ML sees the possibility of 1) competition reducing from smaller telcos as they could selectively exit; 2) competition increasing among top three as they may get aggressive in each other’s core circles by bridging their spectrum gaps; 3) Jio’s network quality being much stronger on pan India basis versus earlier only 1800/2300 MHz network in case of a deal with RCOM.

Bharti Airtel stock price

On September 22, 2015, Bharti Airtel closed at Rs 343.20, down Rs 8.9, or 2.53 percent. The 52-week high of the share was Rs 452.45 and the 52-week low was Rs 332.60.

The company’s trailing 12-month (TTM) EPS was at Rs 32.61 per share as per the quarter ended June 2015. The stock’s price-to-earnings (P/E) ratio was 10.52. The latest book value of the company is Rs 199.95 per share. At current value, the price-to-book value of the company is 1.72.