Indian Mobile Sector – Cloud of Spectrum Uncertainity

Overall we are still relatively cautious on Indian Telecommunications given high valuations, regulatory drama and clearly the 2G auctions continue to drag on. The regulatory landscape has never been easy to call, but with every delay in 2G
auctions, the risk of large license renewal payments is reducing.

For the upcoming auctions scheduled in March, none of the Indian telcos have expressed interest for 1800Mhz/900Mhz spectrum bands and only MTS has submitted interest for 800Mhz spectrum band. As background, for this auction, the government was making available 800Mhz in all circles (no bids in previous auction), 1800Mhz spectrum in 4 circles of Delhi, Mumbai, Rajasthan and Karnataka (no bids in the previous auctions) and 900Mhz in Mumbai, Delhi and Kolkata. This raises more questions about what’s next?

The telcos appear to now be collectively taking a stand on the spectrum prices which they have been saying is too high and this will be seen as a positive sentiment driver for the stocks. Nevertheless, we are still not at the end of the regulatory process, and there could still be several iterations which could create volatility, in our view.

As far as the market leader Airtel is concerned, recent management shuffle and its new India CEO could take a more proactive approach on improving profitability. The business has significant operating leverage. Airtel’s license renewals start kicking in from 2014 onwards, which will see cash outflows.

In the long term, Airtel fares well on metrics like scale (+200mn subs), cash generating ability (+USD1bn pa), earnings diversity (20 markets), marketing positioning and reach. These factors are critical for long-term sustainable growth, especially as most of its markets have low data penetration rates.

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