Indian telecoms - The never ending soap - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Indian telecoms - The never ending soap

Oct 22, 2012

Flashback to 2000

The country was dominated by the PSU telecom operators. Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) were the masters of Indian telecom. We all had a fixed line connection. Mobile telephony was in its nascent stage. Whoever had a mobile phone used it sparingly as the cost of using it was sky high (as much as Rs 16 per minute for domestic calls).

Fast forward to 2004

Mobile telephony started to pick up at a faster tick as compared to fixed line phones. The reason was the huge investment required in the latter. With competition in mobile phone space going up, the cost of using the mobile phones started to come down. As a result, people preferred to switch to mobile telephony. The result was that the telecom sector was touted to be the best place to be in for investors. In an under penetrated country like India, it was natural that the growth would be exponential. And this is exactly what happened.

Jump to 2008

Every company wanted a piece of the telecom pie. The erstwhile Telecom Minister went on to give a license and spectrum to whoever he pleased. Result being that suddenly there were more operators in the country than anywhere else in the world. As competition shot up; telecom tariffs came down. With increase in affordability and penetration, in the urban areas, some people had more than one connection. The focus shifted to the rural areas where penetration continued to be lower in comparison. As companies tried to dig deeper for increasing coverage, the costs kept on going up. Result being that they started operating on narrower margins. This is just for the older incumbents. The new companies were just bleeding away.

Coming back to the present

The reason why we gave you a brief walk through the past was to make you understand what the sector has been through. From being the apple of every investor's eye it is suddenly the most shunned sector. A big reason behind this is the telecom regulator. First it delayed the telecom policy. Even when the policy was released after a long deliberation, it did little to address the concerns of the operators.

The new saga is the spectrum. And this is what the troubles of the telcos seem to be revolving around. There are actually two angles to this saga.

The first is related to the auctioning of the spectrum and licenses that were cancelled by the Supreme Court earlier this year. The apex court had cancelled all the 122 licenses that were issued in 2008. It has been proposed that these licenses and related spectrum should be auctioned. The reserve price set by the regulator for this is set at Rs 140 bn which is even higher than that for the 3G spectrum auctioned in 2010. Considering that 3G spectrum is considered to be premium as compared to 2G spectrum this reserve price has been touted as unfair by the operators. Moreover the regulator plans to auction only a part of the total spectrum that was allocated under the cancelled licenses. This has faced severe opposition from the operators especially the newer ones who have questioned the safety of their investments. Considering that they have already invested a sizeable portion of funds in the telecom sector, they were looking forward to participating in the auction in order to get back in the game. However with the reserve price set at what it is they are now in two minds. Two operators - Etisalat and Bahrain Telecom, have already shut shop and backed out. The remaining ones are doubtful over participation as well. Even the incumbent PSUs are reluctant to participate in this auction as they do not think that they have the financial flexibility for the same.

The second angle is related to the 2G licenses of the existing GSM operators. The regulator has proposed charging them for the spectrum they hold in excess of 4.4 MHz. For spectrum in excess of 6.2MHz, the fee would be charged on a retrospective basis. So in circles where the companies hold in excess of 6.2MHz of spectrum, they would have to pay the fees for the excess part. This fee would be based on the price decided in the auction process.

So if we combine the two, operators are looking at a hefty payout for the 2G spectrum fees. So much so that some of them (BSNL and MTNL) are seeking a bailout from the government. Companies like Bharti Airtel are looking at listing a subsidiary to raise funds. Others would look at raising debt and thereby further stretching their already stretched balance sheets.

The question that comes to mind is why would the regulator do this? Does it have no regard for the operators? Would its decision be good for the sector in the long run? The answer to this is a bit vague. On one hand we can say that the companies are looking at financial pain. And compared to the margins that they enjoyed in the past, the future would be bleak. Another point of view could be that the companies and the sector have enjoyed healthy returns till competition shot up in 2008. As a result they are used to the happier times. Therefore the tough stance taken by the government has come as a rude shock.

Either which ways one thing is for clear. The past is no longer the mirror to the future. Telecom companies would be looking at tougher times. And only the fittest would survive.

We would discuss the financial impact of the spectrum policy in our next article.

Equitymaster requests your view! Post a comment on "Indian telecoms - The never ending soap". Click here!

1 Responses to "Indian telecoms - The never ending soap"

Ramanathan

Nov 3, 2012

When is the next article planned?

Like (1)
  
Equitymaster requests your view! Post a comment on "Indian telecoms - The never ending soap". Click here!

More Views on News

Why Did Tata Communications Shares Plunge Today? (Views On News)

Apr 29, 2021

Key takeaways from Tata Communications Q4FY21 results.

More Views on News

Most Popular

Is Intraday Trading For You? (Fast Profits Daily)

May 13, 2021

Do you think you have what it takes to be an intraday trader? Find out in this video.

My Secret to Find Breakthrough Stocks (Fast Profits Daily)

May 7, 2021

I've used this trading technique for many years with great success. I'm sharing it with you today.

Are the Stock Markets Deaf to Covid Agony? (Profit Hunter)

May 6, 2021

Why are markets discounting the economic impact of Covid?

The Key to Profit from India's EV Revolution (Profit Hunter)

May 7, 2021

Stocks you must consider investing in before buying your first electric vehicle.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE TECK


May 14, 2021 (Close)

MARKET STATS