Heat & dust later, better times ring for telcos

Talk about a silver lining. Experts believe the Supreme Court’s recent verdict scrapping 122 telecom licences is, in fact, pushing the embattled telecom industry towards a better future.

It is also bringing some order in the sector, which has taken a huge knock from the alleged 2G scam.

For one, non-serious players like S Tel and Etisalat have exited — with less-than-attractive returns.

On the other hand, long-term foreign investors such as Uninor and Sistema have decided to hang in and protect their stake in the country. And they are leaving no stone unturned to convey this message.

Meanwhile, the competitive intensity has increased with telcos trying to retain and add subscribers through higher dealer margins, market spend and lower promotional tariffs.

Gaurav Malhotra, Ravi Sarathy and Jitender Tokas of foreign broking house Citi believe the battle for subscribers will continue till the completion of 2G licence auction, expected to take place in June if the SC directive is adhered to.

“We believe these operators (whose licences have been cancelled) would be trying to bulk up before finalisation of auction rules in order to pressurise the government to set favourable auction rules (low reserve price and two-step auction),” the Citi analysts wrote in a note to the clients on February 24.

Morgan Stanley analysts Vinay Jaising, Vanessa A D’Souza and Anirban Roy feel telecom regulations are moving in a more favourable direction post the SC ruling. They view the verdict as a huge positive for the sector as it will lead to consolidation by flushing out players with lower stake and improve spectrum availability, which will help in keeping its price in check.

Also, a delay in auction is seen cooling down competition in the sector due to the uncertainties that would persist. “We think it (auction) could take up to 12 months (as against four months). This, in our view, would be positive for the incumbents to build up cash flows, and also lead to a benign competitive environment, as the new operators will not be aggressive on rollout till they are sure they have the spectrum for the longer term,” Jaising, D’Souza and Roy wrote in a note dated February 23.

According to the trio, the government’s decision to go for a uniform licence fee of 8% is beneficial for incumbent telcos Idea and Bharti.

Kamlesh Bhatia, principal research analyst, Gartner, sees the incumbents chasing the customers of the new players who have lost their licences, but concedes that such baskets are not worth much.

“The impact (of taking subscribers from new players) on topline will be marginal. Besides, incumbents are now pressed for cash, so they are in desperate need to avoid customers who will strain their margins further,” said Bhatia. According to him, incumbents should instead focus on leveraging their value added services, customer experience and mobile broadband to increase value creation.