» Business » More woes for India's telecom sector

More woes for India's telecom sector

By Akash Joshi
May 13, 2010 10:11 IST
Get Rediff News in your Inbox:
Lower margins, caused by substantial cash outflows and increasing competition, are seen as negatives for the sector, says Akash Joshi.

Woes of the telecom sector have just become worse. The BS Telecom Index has shed 12.37 per cent since the beginning of this year, as against a 1.86 per cent dip recorded by the Sensex.

Telecom players, especially in the GSM area, are likely to face cash outflows, after the Telecom Regulatory Authority of India (Trai) recommended a one-time levy on 2G spectrum allocations beyond 6.2 megahertz (MHz), with the price discovered in 3G auction to be used as the benchmark.

According to estimates, around 159 MHz of 2G GSM spectrum is beyond the threshold created by the regulator.

Bharti may have to return around two Mhz 2G spectrum in six markets. The outflow due to the levy can be in the range of Rs 3,000 crore to Rs 5,500 crore (Rs 30-50 billion), depending on the auction.

According to estimates, this may have a 100-basis-point impact on earnings before interest, tax, depreciation and amortisation (Ebitda) margins and a Rs 10 per share impact on net earnings.

Similarly, Idea may have to shell out around Rs 1,200 crore (Rs 12 billion) and could see a Rs 4 per share impact on earnings. The impact on Reliance Communications and Tata, which also use CDMA technology extensively, is not likely to be so severe.

Tower companies, such as Bharti Infratel and Reliance Infratel, and internet service providers will have to shell out 6 per cent of revenues as license fees and will see earnings downgrade by around 10 per cent.

New players like Uninor and Aircel are not expected to see any major impact. They may see their spectrum allocation rise to 6.2 Mhz from 4.4 Mhz at no additional cost. A silver lining in the cloud will be the reduction in operator license fees from the current 6-10 per cent levels to 6 per cent by 2014.

These savings could make up for the one-time spectrum charge over a three year period, assuming there is no tariff war. There may be an additional 2 per cent discount based on the extent of rural penetration.

Current norms may also restrict consolidation, as the regulator wants to have around six players in a circle. This means that more licences may be offered.

Moreover, the market share of the combined entity should not be more than 30 per cent of subscribes/adjusted gross revenues in the circle. Analysts will now be watching out for 3G auctions that will decide the quantum of outflows for companies.

Get Rediff News in your Inbox:
Akash Joshi
Source: source

Moneywiz Live!