Column : Any takers for telecom stock?

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SummaryMarket leader Bharti Airtel looks stressed, worse is to come, and we haven’t even seen the Reliance impact as yet.

At a six-year low last month, the Bharti Airtel stock would have caught the attention of serious investors. Mukesh Ambani, for one, must have given it more than a second look, wishing there had been more of the stock floating around for Reliance Industries Limited (RIL) to pick up. After all, RIL has made no secret of its aspirations of re-entering the telecom space, having armed itself with a pan-India BWA licence, and most analysts are betting the conglomerate will not stay out of the voice space. The senior Ambani would have loved to get his hands on India’s biggest telco even if it’s overloaded with debt—net debt to ebitda for Bharti, at the end of March 2012, was 2.8 times and the net debt to equity 129%—because he has both the balance sheet and cash flows to do it.

RIL is sitting on R70,000 crore of cash and spewing more of it each year, so much so that shareholders are weary of wondering what it will do with the money. In contrast, Bharti’s balance sheet is weighed down by borrowings: the acquisition of Zain’s operations in Africa in early 2010 led it to borrow over $8 billion. One brokerage labelled the valuation as ‘eye watering’ given it was at a 40-50% premium to the valuation being contemplated for the MTN acquisition and cautioned at the time that the deal could ‘materially stress Bhart’s balance sheet’. In mid-2010, Bharti forked out some $2.6 billion for 3G spectrum in 13 circles—or roughly 14% of the firm’s current market capitalisation—and the firm’s long-term debt stands just short of R50,000 crore. That in itself wouldn’t have been such a bad thing but for the rather turbulent regulatory environment and the intensely competitive environment that the telcom industry finds itself in today. The 2G scam and the Supreme Court’s cancelling 122 licences given out to telcos since 2008, vitiated the atmosphere and has resulted in the government pegging the reserve price for auctions at R14,000 crore. Moreover, it’s going to take longer than earlier envisaged with the auction being held in January 2013. Also, while Trai had recommended the spectrum usage charges be lowered to 3%, this may not come through.

To cut a long story short, Bharti, a first mover in India’s telephony game with efficient spectrum in the 900 MHz band is now faced with the unpleasant prospect of either giving up its

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