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Rallying on reforms
RationalExpectations
Government hiked annual charges in lieu of no upfront fees but insisting on both together is asking for trouble
iving advice on what stocks to buy and what stocks to sell is pretty dicey, but when its a sure shot that may not be such a bad idealike Reliances stock will do better if the government raises the gas price RIL gets. Telecom is one such sure shot, and heres the advice: till the government changes its policy, youre going to make a loss each extra day you hold on to telecom stocks. Apart from the dismal economic conditions, the messed up government policy is the main reason why there are such few takers for next weeks auctions that look certain to be a washout given the number of players participating is really low. A good place to begin is the R30,000 crorea third of this from PSUs BSNL and MTNLthat the EGoM wants telcos to pay for the extra spectrum they have (table 1). While telcos argue they got the extra spectrum as a result of bona fide government policy, this is missing the pointafter all, Uninor can claim it got its licences out of government policy that everyone in the government argued (some still do!) was bona fide till the Supreme Court ruled otherwise. The question is whether the government got compensated for, say, giving spectrum worth R5,000 crore for an upfront payment of
just R1,651 crore. cannot have large upfront Turns out, the governmoney and also have ment did get compensatlarge annual surcharges. ed. Heres why: when telTo put this in perspective, cos were given this extra take the example of a firm spectrum without being that buys 5 MHz at todays charged an upfront aucreserve pricesthis will tion-type fee, the governcost it R14,000 crore. Typiment raised the spectrum cally, this telco should be usage charge (SUC) SUNIL JAIN earning R15,000 crore of which telcos pay apart annual revenues, which from the 6-8% annual limeans it will pay R1,450 cence fee. The SUC was 2% of adjusted crore of licence/spectrum fees. But to gross revenues (AGR) when telcos bepay R14,000 crore of upfront charges, gan their operations with 4.4 MHz of the telco will be incurring finance spectrum, rose to 3% of AGR when telcharges of a similar nature. In other cos had up to 6.2 MHz of spectrum, 4% words, telcos are being asked to double for 8 MHz of spectrum, and so on. Sadtheir payments which, based on toly, Trai provides data for SUC paydays ebitda margins, means a 40-50% ments only from 2008 onwards while cut in these margins. firms started getting extra spectrum How this leaves industry no money 7-8 years earlier, but even data since to finance themselves can best be seen 2008 shows telcos paid R17,248 of specfrom some real-life industry numbers. trum till June 2012. Considering that Gross revenues for industry were the SUC should have been just 2%, this about R1,60,000 crore in FY12 and means telcos have already paid up roughly R49,000 crore of this was given R9,463 crore extra (table 2) for this exout to telcos by way of inter-connectra spectrumconsidering telco lition usage charges, leaving an AGR of cences still have some years to expire, R1,10,000 crore. Subtract the licence this number could conceivably go up fee/spectrum charges (also from Trai to around R20,000 crore. data), then around 20% for sales and Which brings us to the larger point marketing and another 5% for staff of the auctions and government costs. You then need to subtract the greed. If the government wants large costs of operating the networktelcos money upfront, let it take this; but it can either own their networks or hire
it out. For ease of calculations, assume the network is leased. The industry has around 4.5 lakh towers and each gets a rental of around R62,000 per month, giving you opex costs of around R33,500 crore. All of which leaves you with an ebitda of R22,600 crore, or around 14.3% (table 3). Now lets move to the auctions, where the government has put a base price of R14,000 crore per 5 MHz of spectrum. Trai has recommended multiples of this for other bandsa multiple of 2, for instance, is suggested for 900 MHz spectrum. Based on industrys current spectrum holdings, this is worth R2,10,000 crore. Given this involves a financing cost (and were not even talking amortisation yet) of R21,000 crore, were left with under R2,000 crore of our ebitda. Bring in the R1,80,000 crore of current industry debt taken to fund capex, and were seriously out of the money. Hopefully, once the results of next weeks auctions seep in, the government will figure this out and revert to a more sensible telecom policy. Otherwise, with telcos starved for cash, the big broadband rush we are looking forward to will never happen. Nor will the big productivity hike that is contingent upon this. sunil.jain@expressindia.com
Obama vs Romney
R crore 1 Gross revenue (wireless) (R cr) Aggregate Spectrum Excess 2 AGR (wireless) (R cr) gross revenue charges collected* 3 Interconnection cost (1)-(2) (R cr) 4 Licence fee (R cr) Bharti 1,24,434 6,118 3,629 5 Spectrum fee (R cr) Vodafone 80,656 3,810 2,197 6 Sales & marketing (R cr) 20% of GR Idea 50,853 2,358 1,341 7 Staff cost (R cr) 5% of GR RCom 38,142 1,015 253 8 Total cost (3+4+5+6+7) (R cr) Numbers of towers Total, including others 3,89,234 17,248 9,463 9 Total opex cost* (R cr) 10 Total cost (8+9) (R cr) * For 4.4 MHz, spectrum charges are 2% of AGR. But as you get 11 Industry ebitda (R cr) more spectrum, rates raised progressively to 3% for 6.2 MHz of spectrum, 4% for 8.2 MHz of spectrum, and so on. Only data for 12 Industry ebitda %
2008-12 available with Trai. By the time the licences come to an end, the extra payment could well exceed R20,000 crore
4) Charging high entry fee along with high annual fees will kill industry
R crore Cost of spectrum currently held by industry at EGoM/Trai formula* Additional interest cost@9.75% pa Ebitda left to service existing debt (R cr) Total industry debt (R cr) Interest payment@8% (R cr) Shortfall (R cr) 2,11,400 20,611.5 1,950.97 1,80,000 14,400 -12,449
* Based on industry having to pay R14,000 crore per 5 MHz of 1800 MHz. And after that, the Trai recommended multiple has been used for other bands Source: Authors calculations
Canvassing China
ANDROID ALERT
Android could be the undoing of not only Apple, but even Samsung, which is currently heavily reliant on it
DESPITE the much-hyped and well-received recent release of Apples iPhone 5, not to mention the superlative sales figures of the iPhone 4S, iOSs marketshare is still a paltry 14.9% in the third quarter of 2012, according to IDC. Apples iOS system is a distant second to market-leader Android, which, with a 75% marketshareup from57.5%thepreviousyearhasconsolidated anear-insurmountablelead.GooglesstrategywithAndroid,of making it available to a wide range of phone makers (and hence a wide range of pricepoints),iskeytothisleadconversely ,Applespolicyof pricingits phones for high-end niche customers is the reason behind its crawling rise in marketshare (from 13.8% in Q3FY11 to 14.9% in Q3FY12). The availability of Android has enabled other phone makers like Samsung to eat into Apples marketshare in the hardware space as well. Samsung firstovertookAppleasthetopsmartphonesellerinQ3FY11,with20%of worldwide sales compared to Apples 14.5%. These numbers stand at 31.3% for Samsung and 15% for Apple a year on. Several analysts, including those from IDC, argue that Apple needs to changeitsstrategyitneedstoreleasecheaperproductsandgetoutof its niche if it wants to survive. The iPad Mini was such an attempt in the tablet market; Apple needs similar thinking in the smartphone space. Interestingly ,however,analystsalsosaythatSamsungseasyrideusingAndroid could be its downfall in the medium term. With its acquisition of MotorolaMobility ,Googlesaimisanin-housephonecoupledwithitsAndroidsoftware,atwhichpointitcouldwithdrawAndroidsusefromSamsungandtherest,orofferthemawatereddownversion.If Samsungwants to remain on top, it will soon have to develop its own operating system.
reshuffle will add more teeth to the government functioning. Also, it is time non-performing and corrupt ministers are shown the door. Further, the role played by finance minister P Chidambaram in matters of putting the Indian economy on the right path amid the global meltdown is commendable. Besides, the governments social sector programmesfor which plenty of money has been allocatedare praiseworthy. At the same time, the government has tough tasks ahead. Employment generation, speeding up of infrastructure works and strengthening relations with our neighbours like China and Pakistan are the things the government should be doing immediately.
worse than the previous one. For supporting people, the government needs to support things that will benefit them. And the Haldia port needs to be restored to the position for which it was intended to serve not only West Bengal but also Bihar, Bhutan and the Northeast. People should realise the danger and raise their voice so that the Centre and the state join hands to set things right with not only Haldia port but also West Bengal as a whole.
REGD. No: DL-21048/03-05 R.N.I. No. 26750/74 Printed and published by RC Malhotra on behalf of M/s The Indian Express Limited and printed at The Indian Express Limited Press, A-8, Sector-7, Noida-201301 and published at Express Building, 9-10, Bahadur Shah Zafar Marg, New Delhi. Phone: 011-23702100, Fax: 011-23702044. (Air Surcharge: Rs. 2.00 Ranchi & Guwahati; Rs. 5.00 Imphal; Rs. 6.00 Kathmandu) Chairman of the Board: Viveck Goenka Group Editor-in-Chief: Shekhar Gupta Managing Editor: MK Venu Executive Editor (News): Subhomoy Bhattacharjee* (*Responsible for selection of news under the PRB Act ) Copyright: The Indian Express Limited. All rights reserved. Reproduction in any manner, electronic or otherwise, in whole or in part, without prior written permission is prohibited.