Trai recommendations are positive for the incumbents: The key recos include (a) Spectrum pricing—(i) 1800MHz—Pan-India base price cut 37% from the failed March-13 auctions, (ii) 900MHz– 1.6-1.7x of 1800Mhz band (Mumbai, Delhi, Kolkata) v/s 2x previously, (iii) Refarming—no reservation of 900MHz band for incumbents, and (iv) Spectrum usage charge–flat charge of 3% for spectrum acquired post-Nov-12; highest slab at 5% (3-8% previously). While these recos will have to be accepted by the DoT (high probability), we view the spectrum price cut and reduced usage charge as positive. Maintain a positive view on the sector and retain Idea as top pick.
Lower spectrum price helps reduce impact of licence renewals: Our TPs (target prices) include spectrum hits of R45/32 per share for Bharti/Idea for licence renewals. The new recos, if accepted, would help reduce the hits to R40/27 per share, respectively. The authority has recommended not setting aside any spectrum in the 900MHz band for existing holders. However, the minimum bid quantum (5MHz) should ensure that only operators with large B/S and high quality subscribers (read incumbents) would bid for this band, lowering the risk of any business disruption for the incumbents.
Spectrum usage charge should be lowered: Operators currently pay 3-8% (of adjusted gross revenues) as spectrum usage charge. Trai has recommended a flat charge of 3% for any spectrum acquired post-Nov-12 and the highest slab to be at 5%. We estimate this, if accepted, would increase fair values of Bharti/Idea by 3%.
Roll-out obligations will hurt the new entrants more: Trai has recommended that all villages with 5000+/2000+ population need to be covered within 5/7 years of allocation (2-4 years for incumbents). This is likely to impact the smaller operators more, given they are relatively more urban focused and also don’t possess the more efficient 900MHz band spectrum. However, intra-circle roaming should help cushion the impact for all.
Other recommendations: (i) Spectrum trading should be permitted; and (ii) feasibility of E-GSM should be explored and 800Mhz auction shouldn’t be carried out as of now.
Valuation: Our target price for Idea of R205 is based on: (i) core business value of R220/share based on Dec-14e DCF (discounted cash flow); plus (ii) the Indus Towers stake valued at R17/share (Dec-14e DCF); minus (iii) R32/share for the regulatory outgo.
Risks: Downside risks that could prevent the Idea stock from reaching our target price include: (i) Sustained high competitive intensity; (ii) Increase in the number of