India's currency and stocks rose as it kick-started the long awaited spectrum auction for 3G and Broadband Wireless Access (BWA) on Friday. Winners can roll-out next-generation mobile services -- in the world's fastest growing telecommunications market with around 600 million existing customers -- starting September 2010.
Three key points for investors -
1. INR appreciation may continue in the medium term as companies tap foreign lenders to fund/refinance their bids.
2. Portfolio funds likely to shift weights positively to play the currency rise and improved sovereign outlook, boosting equity valuations.
3. Competitive bids may further stretch the balance sheets of India's telcos. Strained debt levels could cap irrational bids.
India's largest player Bharti's debt-to-EBITDA level is greater than 2.5 times after its acquisition of Zain assets. Two other big players Vodafone and Reliance Communications already have $4bn of debt each.
From the Standard Chartered India team: "The rating agencies are closely monitoring the government’s efforts towards delivering on its fiscal consolidation promise, and therefore a successful execution of the 3G auction would bode well for the Indian rupee (INR) over the medium term. We expect this should lead to increased investor optimism about India’s sovereign outlook and give a fillip to portfolio inflows. The market also expects a pick-up in debt inflows, following the Reserve Bank of India’s decision in late 2009 to allow companies to raise external commercial borrowings (ECB) in order to bid for spectrum allocation. In fact, with the date of the auction nearing, the FX market has reportedly begun to position itself for a pick-up in ECB inflows."
Analysts at institutional brokerage India Infoline believes that imminent policy changes by the Telecom Regulatory Authority of India (TRAI), will cap aggressive bids. "We strongly believe that operators lining up to bid for 3G spectrum will consider that: 1) BWA offers a second chance. 2) the immediate requirement is additional spectrum for voice, for which 2G spectrum may soon also be available through trading or M&A (if the policy changes in the direction recommended by the May 2009 Spectrum report; this, we believe, will soon be announced, at least by TRAI. 3) intra-circle roaming. These factors should prevent bid values from rising to irrational levels, except perhaps in Delhi and Mumbai."
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