|Telecom's new ring|
|Saturday, 17 November 2012 06:46|
Lower base prices, and other changes, offer hope
Though the EGoM is yet to take a decision on whether to lower the reserve price for important circles like Delhi and Mumbai (which account for 40% of the all-India reserve price) where no bids were received in the just-concluded telecom auction, several brokerages are already assuming this is a done deal and are re-rating telecom stocks that were down in the dumps just some weeks ago. The fact that several other parameters are looking better in the September quarter also suggests some pricing power may be coming back. As our front page story today points out, Bank of America Merrill Lynch has upgraded Bharti Airtel and Idea to a ‘buy’ from ‘neutral’, Kotak has raised its target price for Bharti from Rs 300 per share to Rs 325, from Rs 90 to Rs 101 for Idea, and from Rs 43 to Rs 50 for RCom. How important the EGoM’s decision will be is best seen from the impact on the Rs 30,000 crore that industry has to pay for the ‘extra’ spectrum it currently holds. In the case of Bharti Airtel, for instance, Kotak estimates the per share negative impact is R22, so a one-third cut, say, in the all-India reserve price, will give the Bharti Airtel share an upside of R7. A similar cut in the base price of the 900 MHz spectrum that is up for refarming will give an even bigger kick to telco share prices.
While subscriber churn continues to be very high—for every 10 subscribers telcos acquire, only 1 stays back—September data for telcos shows there has been a slowing in subscriber acquisition costs, largely through a cut in dealer commissions. In the case of Bharti Airtel, customer acquisition costs are down 100 bps as a share of revenues in September and this was 300 bps in the case of Idea. That is why, despite top line wireless revenues having fallen by 2-4% on a sequential basis for listed telcos like Bharti, Vodafone, Idea and RCom, ebitda margins have stabilised for Bharti and RCom, have risen marginally for Idea, and hugely for Vodafone (Vodafone data is available on a half-year basis), though that is largely due to the fall in its capex, from R2,430 crore in April-September 2011 to R1,700 crore in April-September 2012.
The evidence on the discounting of tariffs slowing is largely anecdotal, but the auctions suggest telcos are now behaving a bit more rationally, which is why firms like RCom decided to stay away from the auctions and even those who looked like they were going to bid for more circles eventually bid for less. Norway’s Telenor, which played havoc with industry fortunes with its per-second billing, was operating in 13 circles before its licence was cancelled and has now bid for just 6 telecom circles (and this time around, Telenor is not going to be in Mumbai). Which is why revenues per minute have stabilised for Bharti and Idea, and have risen a bit for Vodafone and RCom. And while voice revenues continue to fall, data revenues have grown—from 3.1% of revenues in September 2011 to 5.1% in September 2012 for Bharti. For telecom investors, the next few weeks in which the government will decide on reserve prices are going to be critical.