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Wednesday, May 12, 2010

Bharti, Idea shares drop; earnings seen hit

A new proposal to levy additional fees for mobile spectrum in India’s cut-rate telecom sector stoked earnings worries for Bharti Airtel, already caught in a vicious price war and a pricey acquisition.Shares in India’s top mobile operator, which reported its first profit fall in three years last month, dropped nearly 9% and were the biggest losers in a steady Bombay’s 30-share index. Smaller rival Idea Cellular lost 7.5%.

On Tuesday, the telecom regulator recommended companies pay a one-time fee for holding 2G radio-spectrum beyond 6.2 mega hertz (MHz) based on 3G prices, a move that will hit established operators dominant on the GSM platform.“This has come at a time when Bharti is working on closing the Zain deal integration, 3G auction is acting as a burden and the local competition is not showing signs of stabilising,” said Sanjay Chawla, an analyst at Anand Rathi Financial Services.

Analysts said the proposal would stretch the balance sheet of leading players such as Bharti, Vodafone’s India unit, and Idea Cellular, who are seeing a surge in capital expenditure due to an ongoing auction for the 3G spectrum.Bharti, controlled by billionaire Sunil Mittal and also 32% owned by Singapore Telecommunications, has been struggling in a margin-chomping price war with Reliance Communications and other rivals in the world’s fastest-growing and arguably the most competitive market. Call rates have slumped to as low as 0.7 US cents per minute.

The Indian mobile sector has 15 operators and about 600 million mobile users, making it the world’s largest market after China.New subscriber additions of nearly 16 million a month have attracted overseas firms such as Norway’s Telenor, Japan’s NTT DoCoMo and Abu Dhabi’s Etisalat, but profit margins have taken a hit due to a tariff war.

Bharti shares fell to their lowest level in more than five months. On Tuesday, Bharti fell 3.1% and Idea shed 5.3%.Reliance Communications shares lost 2.1%, and analysts said the No. 2 operator would be less impacted as it held less additional 2G spectrum than its rivals.“The proposal is going to be negative for the stocks in the near-term, more so because regulatory moves always create uncertainty in the market,” Chawla said.

Bids for one set of all-India 3G spectrum licence have reached $3.1 billion as of Tuesday and the tender process, in which nine mobile carriers including Bharti are participating, is still on. Last month, Bharti said it expects to close its $9 billion deal to acquire Kuwaiti telecom Zain’s African assets by mid-May.

The sector regulator’s recommendations have to accepted by the telecom ministry before they become law.Brokerage Prabhudas Lilladher expects Bharti to pay one-time 2G spectrum fee of Rs6,146 crore ($1.4 billion), while Idea would have to pay Rs2,481 crore if the regulator’s recommendations are accepted by the telecom ministry.

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