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Incumbent telcos to gain from consolidation ahead: Kotak

With the conclusion of the spectrum auction and the government garnering over Rs 1 lakh crore, Rohit Chordia, associate director at Kotak Institutional Equities says the high spectrum prices make it difficult for weaker players.

According to him, incumbents will reap benefits from medium-term consolidation. The objective of the auction was to renew spectrum and expand data base, says Chordia.

He likes  Bharti Airtel at Rs 415 per share target price.

Below is the verbatim transcript of Rohit Chordia’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: First an overall comment on the sector itself. We know that it is a tall price that the sector is paying for the spectrum that they will get in the latest round but do you think that negativity is largely priced in and the sector is perhaps bottoming out, stock wise?

A: These are interesting times in Indian telecom. Tall price rightly said, if you look at the aggregate spectrum payout that has been made so far and bulk of it has been made in the last four or five years, it is already getting closer to USD 50 billion. This is an industry which generates USD 30 billion in revenues and just about USD 6-7 billion in EBITDA.

So, something has to give, either this industry decides and it is all about competitive forces and players coming to a consensus about tariff hikes and some of the other things, this industry needs to expand meaningfully, the EBITDA base needs to expand meaningfully. If that doesn’t happen you will have an implosion of sorts, you will have a few companies which will be left with unsustainable businesses.

Even today some of these look unviable. So, to that extent we are perhaps moving towards that eventual consolidation. High spectrum prices will make it difficult for a lot of weaker players to be able to renew their spectrum and it will be a slow and steady process but in five years from now the industry structure will look much better. So, to that extent I remain positive on the incumbent, incumbents are going to reap the benefits of that eventual consolidation.

Sonia: Now that the overhang of these auctions are out of the way and for Bharti Airtel the wins from the previous auctions also shields it relatively from all the risks, what would your long-term view be on Bharti as a stock and what is your target price?

A: I like both Bharti and Idea Cellular. My target price on Bharti right now is Rs 415. You spoke about Bharti being shielded and being better positioned – there were two objectives going into these auctions, one was to be able to renew 900 MHz renewal circles and my sense is we will not know the player wise results yet; those have not been published.

However, my sense is Bharti, Vodafone and  Idea all of them have been able to renew at least 5 MHz in all of their 900 renewal circle. So, objective one met, of course they had to pay a price for it but this was not an auction you could have come out a winner out of. The idea was to meet your objective in terms of renewal and expanding data footprint in terms of spectrum while minimizing your damages. I think the incumbents have done a reasonable job there.

Latha: Today the Supreme Court verdict can upset the apple cart you think if it were to decide that they should have renewed it for 10 years and not asked people to bid again? How are you approaching this 11:00am event?

A: Operators have been fighting for that right to extension and their renewal spectrum not to be put in an auction. If Supreme Court agrees to that philosophy it is only a positive for the incumbents. From a judgment standpoint I do not see a situation where a negative can come out of this. The worst case is the Supreme Court says these auctions were fine and you guys just pay up; these prices stay.

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