2G Spectrum Auction : Airtel and Raja are the winners!

The 2G Spectrum auction concluded with government fetching only Rs 9407 Cr against the expectation of Rs 40000 Cr. Out of the 176 blocks put up for auction, bids were received only for 98.

After quashing of the 122 licenses in February, the spectrum allocation was decided to be done through an auction. Subsequently the freed up blocks were put on auction. 11 blocks of 1.25 MHz each in the 1800 MHz bandwidth for all circles except Delhi and Mumbai where only 8 blocks were available, were the airwaves available to be bought back by the telcos. A high reserve price of Rs 14000 Cr for the 5 MHz of spectrum forced several major players to chuck out. At the end, it was left to only 5 players to bid out the whole spectrum.

The five players being Bharti Airtel, Idea Cellular, Vodafone, Videocon Industries and Telewings Communications (Teenor's new company). Bharti said that it was participating just for the sake of it as it did not want to be seen boycotting the auction. Videocon managed to win 6 circles by shelling out Rs 2222 Cr for the same. Bihar was one of the most sought after circles. Even that went for a meager premium. Delhi and Mumbai were ignored as they seemed cost-ineffective.

Earlier, the 800 MHz CDMA spectrum auction also flopped as no one turned up for the auction. Videocon and Tata Teleservices pulled out of the auction at the last moment.

With major blocks remaining unsold, the government is left with a lot of airwaves and the telcos have to service a large mass of public with the little they have got. Expect a lot of quality of service related issues to crop up in the times to come.

So who is the winner in all this fiasco?

Government didn't get the money it was expecting.

People will have higher tariffs and lower quality of service.

Several companies which lost the licenses in the February verdict have certainly not gained anything from this.

Videocon won 6 circles but at a very high cost. If the rumors of Reliance Industries' interests in its spectrum turn out to be true, probably then they may benefit. As of now, it is quite uncertain.

Now, once the auction is over, the government has to come out with a figure, which was supposed-to-be market discovered, to charge the telcos (like Bharti, Vodafone, MTNL etc.) for the excess spectrum. At the base price of Rs 14000 Cr, the excess spectrum would have costed the companies an arm. But now with the subdued reaction to the auction, the government would be pushed to the corner. If the government still asks the higher prices for the excess spectrum, Telcos may ask the government to take it back. This would mean more and more service blackouts in the country. Reliance Communications holds excess spectrum in the 800 MHz CDMA spectrum and as per the present pricing, it would cost them Rs 3300 Cr to continue holding it. The highly leveraged company would be well-adviced to return the spectrum to the government.

The freed spectrum would then have to be re-auctioned some months later and at that time, the base prices would certainly be lower than what it was for this auction. The telcos would get the spectrum at a much lower prices. This scenario would be highly beneficial for the new telcos, specially those who didn't participate this time around. But, this would lead to a lot of legal recourses from the existing telcos, specially those who bought in the present auction. TRAI/DoT may go to courts to sort it out or may lower the prices for telcos who won the spectrum now. Both the scenarios would mean that the government returns some of the money it has made in the present auction to the telcos.

But the more likely scenario would be that TRAI, now, reduces the prices for the excess spectrum and charges a lower fee from the incumbents. This would mean that the Telcos do not return the spectrum and the telecom structure in India is not dashed that hard. Bharti Airtel will be the clear winner over here! The consolidation has already begun in the telecom sector and Bharti, being the market leader, is going to gain a lot of traction in the days to come. With the issue of excess spectrum going its way, the company would be shelling much lower than the anticipated Rs 5000 Cr for the excess spectrum it is holding now. Similarly for Vodafone. Idea also has an advantage going ahead but may not be as big as Bharti and Vodafone. The tariffs cannot remain this low and shortly, the telcos may be hiking the prices to compensate for the high spectrum costs.

Going forward, Airtel, Vodafone and Idea are going to be the top three telecom players in the days to come. Reliance Communications and Videocon have a Mukesh Ambani factor which I believe will play out so that a fourth front emerges which can challenge the existing players. But as of now, that story is in the veils.

Although the tides in the telecom sector are far from settling down, the muted 2G spectrum auction has set the tone for an upwards rerating of stocks of Bharti and Idea, which will see a substantial increase in their subscriber base and ARPUs (Average Revenue Per User) in the days to come.

And the question that I raised earlier as to who is the winner in all this fiasco?

All the politicians involved in 2G scam - right from A. Raja, P. Chidambaram, Kapil Sibbal to Manmohan Singh! They can now proudly say that their method earned better revenues for the government and lowered call rates for the public while the CAG's intervention has incurred more losses.

Investment Idea: Bharti's stock is trading in the range of Rs 270-280. I expect the stock to give a minimum return of 25% in the year forward. One can buy for a target of Rs 340 in the next 12 months.