Telcos may feel heat of Adani Group's entry into 5G spectrum auctions

Airtel stock fell over 5%, while RIL closed 1.3% higher after being down for most of the day

The surprise entry of Adani Group into 5G spectrum auctions changes the dynamics of the telecommunications (telecom) sector. A media statement says Adani Group does not intend to enter consumer mobility services.
 
Adani Group says it will use 5G spectrum to provide private network solutions and enhanced cybersecurity at airports, ports and logistics, power generation, transmission, distribution, and manufacturing operations.
 
Nevertheless, the news is negative for incumbent telecom service providers (telcos). It increases competition in the July 5G auctions, which may mean higher spectrum prices. It shrinks the potential markets for telcos, which were targeting the high-value enterprise segment for 5G roll-out. In addition, there is nothing to prevent Adani Group from getting a unified access licence to target consumer mobility in the future, or moving into the data centre business.
 

It is also quite possible that the telecom policy may be modified to make the entry of new players easier. History, for example, shows that Reliance Group bought 2300 megahertz spectrum in 2010, which could not then be used for voice service. But the policy was later changed.
 
Adani Group doesn’t have the expertise in running telecom networks. But it could easily get into relationships with vendors like Nokia or Ericsson to manage its networks. Given the group’s presence in power and gas, for example, it already has right of way in many regions and it could use that experience to roll out public networks quickly if it wants to. At the least it shrinks the enterprise opportunity for other players.
 
In practice, Vodafone Idea (Vi) is completely under the gun. It is cash-strapped and may not be able to fight for 5G. Reliance Jio and Bharti Airtel will certainly compete in 5G. As of now, there may be no apparent impact. But their costs will probably escalate in terms of spectrum prices, and their potential market share may shrink in a medium-term perspective.

In terms of share-price movements, Vi remains off the radar for many analysts — it continues to struggle although the stock gained 30 paise to close out at Rs 8.7 on Monday.
 
Airtel, which is also a pure-play telecom firm, lost over 5 per cent.
 
After being in red for most of the day, Reliance Industries (RIL) gained 1.25 per cent, but Reliance Jio is hard to separate from other business segments in the parent.
 
Indus Towers (Bharti Group holds 36.7 per cent and Vodafone Group holds 28 per cent) has seen 1.9 per cent rise. Typically, more players could improve the demand for towers and hence, the tenancy for Indus.
 
Valuations are hard to make — a majority of analysts have retained ‘buy recommendations’ on RIL and ‘neutral’/’hold’ recommendations on Bharti Airtel. Jio holds about 40 per cent revenue share in the telecom market at present, with Airtel at 36 per cent and Vi at 19 per cent.
 
Where valuations are available for Airtel and RIL, these must be a sum-of-the-parts, which means additional error factors.
 
Bharti Airtel seems to have valuations in the Rs 810-890 per share range, with potential upside from stronger tariff hikes, spin-offs of the payments bank, and data centres. The potential downsides include higher competition, over-bidding in 5G, and currency issues, especially in Africa and Sri Lanka. There is an upside from the current levels.
 
For RIL, one valuation offers a price target of Rs 2,917 with Jio valued at Rs 826. Another valuation considers RIL to be worth Rs 2,956 with Jio contribution at Rs 742. Given synergies between Jio, the digital media business and retail segments, only a spin-off would give clarity on Jio’s valuations.