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| Telecom: regulatory risks set off alarm bells | | | New Delhi: The central government’s decision to reject Vodafone India Ltd’s application seeking an extension of its licences in three service areas is the latest reminder for telecom investors about the high regulatory risks in the sector. According to an analyst, the government seems to be effectively coercing established firms to participate in its spectrum auctions through this move. Its attempts to raise large amounts through 2G spectrum sales have come a cropper, with established companies staying away from the auctions. In a worst-case scenario, telecom companies such as Bharti would end up paying higher-than-expected amounts for spectrum. Besides, there is a concern that they may have to sign a new licence agreement with new terms that prohibit 3G roaming and also impose more stringent rollout obligations.
In addition to the regulatory risks, investors appear to be losing patience also since the expected rebound in tariffs isn’t playing out as expected. According to another analyst with a domestic institutional brokerage, while companies are indicating that tariffs have clearly bottomed, they aren’t sounding gung-ho about the possibility of a meaningful increase. What’s more, since operating costs have been rising, especially on account of higher diesel prices, margins are expected to be under pressure even if tariffs increase a bit. In addition, the increase in subscribers last quarter may have led to an increase in subscriber acquisition costs as well, after a lull in the preceding quarter.
Shares of Idea Cellular Ltd have fallen by about 9% compared with their high in mid-January, when telecom stocks had jumped on expectations of a rise in earnings riding piggyback on tariff hikes.
Shares of Bharti have fallen at a much higher rate of over 20% in the same period. This is thanks largely to the summons received by chairman Sunil Bharti Mittal from a special court in a 2G spectrum allotment case last month. As pointed out in this column, while this has impacted investor sentiment, it does provide a good opportunity for investors to buy at relatively reasonable levels. |
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