Developments related to Reliance Jio’s freebies and the new tariffs effective April 01 2017, possibility of Vodafone – Idea Cellular merger, and Bharti Airtel’s acquisition of Telenor India – the telecom sector has been buzzing with activity since the last few months. News triggers have also kept the telecom stocks buzzing. While the S&P BSE Sensex has gained around 12% from its recent low in December 2016, the S&P BSE Telecom index has rallied 24.4% since then.
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However, the rally in individual stocks has been much sharper. Reliance Industries (RIL), for instance, rallied nearly 11% on Wednesday after its telecom unit, Jio Infocomm, announced it would start charging customers. At Rs 120 levels, Idea Cellular, too, is trading close to its 52-week high level of Rs 128. On Thursday, Bharti Airtel soared 11% to its 52-week high of Rs 397, after the company announced plans of buying Telenor (India).
As part of the agreement, Bharti Airtel will acquire Telenor India’s running operations in seven circles – Andhra Pradesh, Bihar, Maharashtra, Gujarat, UP (East), UP (West) and Assam. That apart, Airtel will also be able to access 43.4 MHz spectrum in the 1800 MHz band.
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“I think the consolidation that’s been happening in the telecom space is reaching peak levels. Given the likely price wars going ahead, it is the consumer that will be the ultimate beneficiary. As regards RJIO, the uncertainty in terms of pricing and customer base has gone away. As a result, we now know the average revenue per user (ARPUs), subscriber base etc each incumbent will have. Going ahead, there will be three key players – Bharti Airtel, RJIO and Vodafone – Idea entity, if the merger comes through. The key positive for Bharti in Telenor’s acquisition is the coveted spectrum in seven circles,” says Prakash Diwan, director, Altamount Capital Management.
STOCK STRATEGY
Given the sharp run-up in telecom stocks, analysts now remain cautious, as they anticipate incumbent operators to realign their offerings to compete with RJIO. The latter has set up high network capacity, banking on spectral efficiency of 4G network, which enables it to offer significantly higher benefits to consumers. That apart, analysts expect RJIO to maintain lower-than-incumbents prices. This is likely to lead to further pressure on realisation and subscriber acquisition costs for incumbent players. Stability in competitive environment is one of the most important aspects for profitable growth, analysts say.
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“In terms of individual stocks, I feel Idea Cellular is overvalued and investors can exit this stock on any up move. One can buy Bharti Airtel at lower levels. Reliance Communications, however, will continue to surprise on the upside going ahead,” Diwan of Altamount Capital adds.
For FY17 and FY18, analysts at Motilal Oswal expect Bharti India’s wireless revenue to remain flat, and expect Idea’s revenue to decline marginally by 1%.
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“If the industry aligns to RJio’s offering, only those operators with sizeable data coverage and capacity should be able to protect their market shares and benefit from ARPU accretion. Bharti with around 170,000 sites is far better placed, in our view. We remain positive on Bharti Airtel, but maintain our under review rating on Idea Cellular until more clarity emerges on the Vodafone – Idea deal,” point out Aliasgar Shakir and Jay Gandhi of Motilal Oswal in a note.
Given that the competitive intensity is likely to go up in the months ahead, G. Chokkalingam, founder & managing director of Equinomics Research &Advisory, too, advises exiting the telecom stocks at the current levels.
“Given that the telecom players will drive much of their revenues from data going ahead, the data prices have been on a downward spiral. This will put pressure on their financial performance in FY18 and FY19. It is better to exit telecom stocks at current levels,” he says.