The Telecom Regulatory Authority of India's (TRAI's) new recommendations are a mixed bag for the industry in general and Bharti in particular, and could increase service costs – a negative for affordability. Bharti could also now be eligible for additional spectrum in fewer circles. We await the final government decision, but GSM industry opposition is likely. Still, Bharti's network expansion continues to drive a healthy 30% earnings Cagr over FY07-10CL, and, at 22x FY09CL earnings, the stock remains a BUY. Spectrum allocation, costs
In its newly issued guidelines, TRAI has recommended an increase in subscriber norms (as an interim measure) for spectrum allocation; a one-time levy (ie, of Rs160m for 1MHz in Mumbai/Delhi/A circles) and a 1% higher usage charge for allocations beyond 10MHz; and the constitution of a committee to frame new spectrum allocation criteria. TRAI also supports the auction of spectrum for 3G and WiMax. If accepted by the Department of Telecommunications and the government, these recommendations are a negative for the Indian mobile industry. Specifically, Bharti, which was eligible for additional spectrum beyond 10MHz in 14 of 23 circles, would now qualify for additional in only four circles. For the GSM industry, we believe additional charges and a one-time levy would raise the cost of services and adversely affect margins.
Merger & Acquisition guidelines
In its recommendations on M&As, while TRAI has lifted the existing cap on combined spectrum (2X15MHz in metro/A circles; 2X12.4MHz in B/C circles); and allowed a 20% stake (vs 10% currently); it has also capped the market share of merged entities at 40% either in terms of subscribers or revenues against the current 67% based on subscribers. Alongside TRAI has allowed an existing licensee to use alternate technology subject to payment of specified upfront fees and relevant spectrum charges. We see these recommendations as a mixed bag in light of likely consolidation in the sector.
Rural roll-outs and USO funds
However, we see positives from TRAI's recommendation to use the Universal Services Obligation (USO) Fund to drive a rural rollout, ie specifically, a licensee that covers 75% of development blocks in a circle (excluding four metros) will now be eligible to pay just 3% USO fees vs 5% currently. Still, Bharti's network expansion continues to drive a healthy 30% earnings Cagr over FY07-10CL, and, at 22x FY09CL earnings, the stock remains a BUY.
In its newly issued guidelines, TRAI has recommended an increase in subscriber norms (as an interim measure) for spectrum allocation; a one-time levy (ie, of Rs160m for 1MHz in Mumbai/Delhi/A circles) and a 1% higher usage charge for allocations beyond 10MHz; and the constitution of a committee to frame new spectrum allocation criteria. TRAI also supports the auction of spectrum for 3G and WiMax. If accepted by the Department of Telecommunications and the government, these recommendations are a negative for the Indian mobile industry. Specifically, Bharti, which was eligible for additional spectrum beyond 10MHz in 14 of 23 circles, would now qualify for additional in only four circles. For the GSM industry, we believe additional charges and a one-time levy would raise the cost of services and adversely affect margins.
Merger & Acquisition guidelines
In its recommendations on M&As, while TRAI has lifted the existing cap on combined spectrum (2X15MHz in metro/A circles; 2X12.4MHz in B/C circles); and allowed a 20% stake (vs 10% currently); it has also capped the market share of merged entities at 40% either in terms of subscribers or revenues against the current 67% based on subscribers. Alongside TRAI has allowed an existing licensee to use alternate technology subject to payment of specified upfront fees and relevant spectrum charges. We see these recommendations as a mixed bag in light of likely consolidation in the sector.
Rural roll-outs and USO funds
However, we see positives from TRAI's recommendation to use the Universal Services Obligation (USO) Fund to drive a rural rollout, ie specifically, a licensee that covers 75% of development blocks in a circle (excluding four metros) will now be eligible to pay just 3% USO fees vs 5% currently. Still, Bharti's network expansion continues to drive a healthy 30% earnings Cagr over FY07-10CL, and, at 22x FY09CL earnings, the stock remains a BUY.
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