The markets may be in bull grip, but the rally in telecom stocks may be abating as reality kicks in after the reforms rush.
Telecom shares had risen along with the market, overlooking the fact that the government’s measures had nothing specific for the sector.
Bharti Airtel had risen to Rs 276.30 from Rs 253 at the close of 13 September, a day before the government announced the first set of reforms. Idea Cellular, meanwhile, rose to Rs 87.40 from Rs 84 and Reliance Communications to Rs 64.50 from Rs 49, largely due the announcement of tariff increases.
But there is, currently, no case for a telecom surge.
One, telecom operators’ costs have only risen, as they are still engaged in cut-throat competition. According to a report in Business Standard, telcos are spending nearly Rs 13,000 crore a year on customer acquisition alone. This forms 6.5 percent of the total gross revenue of the companies, the report said. While Reliance Communications has increased the tariff in select circles and plans to do it across circles, chances of its rivals doing it are less. So customer churn is not going away anytime soon.
“The sustenance of hikes across operators primarily depends on market leader Bharti in our view,” HSBC said in a note. “In our view, Bharti will change strategy only when it is convinced that competitors, namely Idea and Vodafone India, are serious about replicating the tariff hike,” it added.
Citi said to begin with, other telecom players will have to discontinue tariff discounting.
Two, the companies have to raise funds if they have to bid in the upcoming 2G spectrum. Since the companies are already highly leveraged, the only way they can raise funds now is by diluting equity or selling assets. Bharti Airtel bought Zain for $10.7 billion, of which $9 billion was debt. Reliance Communications has a debt of Rs 35,000 crore and Idea Cellular Rs 11,500 crore. Raising equity will result in a dilution of earnings. Sales of tower businesses will bring in cash and reduce debt, but that is some time away.
Three, at a reserve price of Rs 14,000 crore, the 2G spectrum auction will only add to the financial strain of the companies. Moreover, if 2G spectrum is refarmed, Bharti will be an early loser.
Four, the entry of a big 800-pound gorilla, Reliance, in the 4G space, can only make life more difficult. Nobody can assume that Reliance will not enter the core voice telephony business. This means more price battles lie ahead.
Five, the TDSAT’s plan to impose a penalty of Rs 50 crore per circle for violation of licences by entering into 3G roaming pacts.
Clearly, there is no case for any re-rating of telecom shares right now.