Talking specifically on the sector, he said that the industry needs consolidation and we may not see any friendly M&A activity in the sector at this point. He does not see much demand for 1800 MHz spectrum, and a possible auction failure on cards for different reasons like price and non-availability of spectrum in parts of the circle like Delhi, Bombay, Karnataka and Rajasthan.
Also read: Offer voice after paying Rs 1,650cr: Telecom panel on 4G
Below is the edited transcript of his interview to CNBC-TV18.
Q: As a broking house are you pushing telecom stocks as one of your favourite sectors? Do you feel that the worst is over for the sector?
A: We have been and remain positive on Bharti Airtel and Idea Cellular. Strategically, we have a neutral weight on the telecom sector but concerns are still present for the sector.
Q: What is your view on the possibility of RIL entering into the voice segment post what the Telecom Commission and the Department of Telecom (DOT) had to say about paying Rs 1,658 crore and 4G license holders can enter into the voice segment. How disruptive could it be and do you see the possibility of RIL entering into the telecom space?
A: There are two questions here, whether RIL will enter the voice market and second how disruptive can they be? Given the data off take we have seen in the last two or three years, since 3G networks was rolled out, and the limited success that Bharti has seen with its 4G rollouts in few cities, I think it is logical to assume that RIL will look at the voice market. Time will only tell if RIL will be disruptive or not. If they want to make a big mark in the voice segment which is dominated by the GSM operators, the incumbents then will probably have no choice but to be disruptive, how disruptive we will wait and see.
Q: What is the sense you are getting in terms of the entry of this big giant into the voice space? Does that happen in 2013 or will there be a painful litigation ahead of it? After all you will have to price in that competitor if you are forecasting FY14 year-end numbers?
A: From a long-term perspective, Indian market will not be ever large enough for seven or eight operators. Indian market will be large enough for 4-5 operators at best, who will be those five operators.
If we include RIL in the list and then start eliminating then we need to see if Reliance could be the fourth or fifth operator or maybe among those four or five operators. Long way is still ahead of them. They are just entering the market and many questions pertaining to organic or inorganic route and others still needs to be answered.
Q: So do you see an M&A ridden telecom industry in FY14?
A: M&A should have happened by now. This industry needs consolidation. As I said, this is not an industry large enough for seven or eight operators to exist peacefully. Some of them will have challenges. M&A has not happened due to some regulatory issues, some pure economics and we need to see how this industry evolves into that sustainable four to five player industry. We may not see any friendly M&A activity in the sector this point.
Q: All eyes are on auction which is scheduled on March 11. What is your view? The GSM base prices have been sliced by 30 percent and CDMA by 50 percent, do you think it will be successful and who would be the bidders?
A: Let us look at the three auctions separately. Sistema Shyam is the only player in 800 MHz space to watch out for. I think they will like to remain in India but bid for circles where they have a reasonable and good market share, especially on data dongle side.
I do not see much demand for 1800 MHz spectrum, and a possible failure on cards for different reasons like price and non-availability of spectrum in parts of the circle like Delhi, Bombay, Karnataka and Rajasthan. So, we need to look at the November auctions in this context. Operators who wanted to stay in the market only bid for the spectrum.
Vodafone was an exception, but they bought top-up spectrum in a few circles. Vodafone's participation in Maharashtra circle was a real surprise. In the upcoming auction there is no such operator who needs to participate. I am watching 900 MHz space very closely here the entire re-farming renewal angle comes into play.
Q: Does it get postponed with the court saying that the entire spectrum coming to the government because of cancelled licenses should be put on the block? Will re-farming get postponed because of that?
A: Government needs around 1800 MHz if they are looking for re-farming. I think it makes sense only for the current holders of the 900 MHz to buy 900 MHz at government suggested prices. So technically to that extent re-farming does not happen. I have read that government is already thinking of a third auction where they will put the balance out on the 1800 MHz side. We need to wait and see if this will impact the March auction or not.
Q: From your earlier response it can be inferred that it will not be an enthusiastic response. Should one expect that there will be subsequent rounds with lower reserve prices?
A: That is what the industry would like. A little bit of to and fro is happening between the government and the industry. Unfortunately, we have started with a high reserve price. The industry would have liked to participate in auctions with a lower reserve price and if the fair value of the spectrum is what the government is suggesting it the auctions would have taken it there. This entire process started off in a manner which has not made it easy for the operators either.
Q: The expectation of tariffs hike is the reason for telecom stock prices doing well and currently it has been by way of reducing minutes and discounting. Has that trend been as per what the analysts were expecting?
A: I think it is a start. Operators understand that they need to do it in a calibrated manner. The government has played its card. They want more money for the spectrum. They believe spectrum value is higher than what the operators have paid historically which is a fair point. The government has played its card.
Operators on their part need to find this money and need to find this money from the customers. The third piece of the puzzle which is the customers, we do not know their reaction. So operators will be careful in risking elasticity. Hence, I think that if it will happen, that is a need of the hour for the sector, for the challengers and incumbents alike, but the operators would like to do it in a calibrated manner.
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