At least two broking houses have raised their target prices for leading telcos like Bharti Airtel and Idea Cellular following the failed 2G auctions where the government got less than a third of the expected price against R28,000 crore that could have been got for GSM spectrum at the base price of R14,000 crore, the government got just R9,400 crore. While BofA Merrill Lynch upgraded Bharti and Idea to buy from neutral, Kotak Institutional Equities has raised its target price for Bharti from R300 per share to R325, from R90 to R101 for Idea and from R43 to R50 for Reliance Communications.
There are several reasons for the optimism, starting with the likely impact of the failed auctions. Most brokerages built in a cut in the reserve prices, something reiterated by Sibal on Friday. This is critical because the reserve price will determine the price of the extra spectrum as well as the cost of spectrum when licences are renewed Bharti Airtels metro licences, for instance, come up for renewal in 2014. The cost of extra spectrum is approximately R30,000 crore but could fall to R20,000 crore if the base price is cut by a third, say, from R14,000 crore per 5 MHz in the recently-concluded auction. If the base price is cut by a third, according to Kotak estimates, this could reduce the drag on the Bharti stock by around R7 or so Kotak estimates the total drag due to the extra spectrum costs for Bharti at R22.
There is then the cost of the 900 MHz or refarmed spectrum. While TRAI has recommended the base price be kept at two times of the 1800MHz (right now R28,000 crore), the EGoM could well reduce this to 1.5 times given the poor response to the 2G auctions. In which case, the price kick to telco stocks could be many times higher.