Telcos slam Trai: Stocks on crash course

Leading mobile phone operators came down hard on the telecom regulator on a day when most saw their stocks on a crash course.

Adding to the already expensive affair of third-generation (3G) bandwidth auctions, the Telecom Regulatory Authority of India (Trai) on Wednesday recommended that GSM and CDMA operators with more than 6.2 megahertz (MHz) and 5 MHz of second-generation bandwidth, respectively, pay a one-time fee to keep the excess spectrum. The fee will be linked to the ongoing 3G spectrum auctions.

Telecom stocks extended their losses on concerns that this could hit the earnings of top telecom operators, which are already witnessing a rise in capital expenditure due to the ongoing 3G auctions.

Analysts said the proposal will hit telecom operators, already battling a margin-crunching call rate war. The telecom sector was going through turbulent times anyway and more bad news from the regulator is battering the pack even more, they said.

Bharti Airtel slid the most in three months as it dropped 8.3 per cent to Rs 261.50. Idea Cellular dropped 8.2 per cent, while Mahanagar Telephone Nigam was down 2.2 per cent.

Reliance Communications barely changed at close, as the company said its additional liability would be minimal. The Bombay Stock Exchange's benchmark index, the Sensex, rose 0.32 per cent or 54.48 points to 17,195.81.

UBS estimates Bharti would need to pay about Rs 8,690 crore (Rs 86.09 billion), while Idea would need to shell out Rs 2,820 crore (Rs 28.20 bilion) for the excess spectrum the companies hold. The fee could lower Bharti's earnings per share by Rs 25 and Idea's by Rs 8.5, UBS said.

The impact is less for Reliance Communications as it owns less than 6.2 MHz of 2G spectrum in all circles except Bihar.

Meanwhile, in an unusually strongly worded response against the regulator, Bharti and Vodafone Essar termed the proposals shocking, perverse and arbitrary.

"The latest recommendations by Trai for allocation of 2G spectrum overturn all existing policies of the department of telecommunications of the last 15 years, recommendations made by various government committees and even the regulator's own earlier recommendations," Bharti Airtel said in a statement.

Increasing competitions and all-time low tariffs have already taken a toll on the company's margins with the company posting a decline for the first time in profit growth in the last quarter.

Bharti hoped that DoT and the government will take a rational approach and summarily reject these impractical recommendations.

In its response, Vodafone said the proposals are against the interest of consumers and the regulator has "cherry-picked dozens of incompatible elements and resulted in a set of proposals which are opaque, illogical and discriminatory".

Most seriously, the recommendations would punish the companies that have invested early and taken the initiative to extend telecom services and would place a critical industry in jeopardy, Vodafone said.

Marten Pieters, Managing Director & CEO, Vodafone Essar, said the recommendations are full of "even more charges, even more opaque spectrum allocation mechanisms and further complications".

The telecom industry has seen very little revenue growth in the last six quarters, and has been impacted by unprecedented price wars.

Against this context, it is extraordinary that the industry would have to pay additional unjustified fees to be able to simply do what it is supposed to do: deliver affordable quality communication services to Indian citizens, Pieters said.

Brokerages also have a dim view on the industry's outlook. Deven Choksey, managing director of Mumbai-based K R Choksey Shares and Securities, said the fall in stocks is sentimental as markets believe the recommendations, if accepted as policy, will be challenged in court.

Rahul Jain analyst at Angel Broking, said if these kinds of pressures continue, it will take these companies at least two to three years to solve these problems.

Nishna Biyani, analyst at Prabhudas Liladher, said one can still expect a 4-5 per cent jump in telecom stocks as the recommendations may not get implemented.

"There seems to be little justification for using 3G bids for pricing 2G spectrum, as the former are driven more by scarcity and lack of a transparent spectrum roadmap," says Anand Rathi Securities.