Less elbow room on tariff front

To be fair, telecom stocks have witnessed more than their share of bad news over the last few years… the price war, a falling subscriber base, lack of clarity in telecom policies and a clutch of scams engulfing the sector that led to the cancellation of licences.

As if that was not enough, the latest suggestion by the regulator of new spectrum rates is only going to make the going tougher.
In spite of this dismal run, telecom stocks have held up reasonably well in the market, which are available at decently high valuations.

Take Bharti Airtel, which has seen a fall from its heady days of `444.70 in August 2011 to the current level of `309. Still, the stock is valued at 24 times its previous 12-month profit. Idea Cellular, which recently announced its results, trades at 38 times its previous year profit.

The blistering pace of growth of telecom companies in India over the years has mainly come from one of the lowest tariffs in the region. Their meteoric rise is also explained by aggressive competition for a finite subscriber base. But of late, tariff rates have flattened, which means any addition to the subscriber base is plateauing. A recent Gartner study remains optimistic, which predicts mobile penetration in India to climb to 72% by 2016 from the current 51%.

But with increasing revenues, cost has grown manifold. The benefit of sales growth is still to reflect in profit numbers. Bharti’s sales — of its Indian operations on a stand-alone basis — have grown from `25,703 crore in 2007-08 to `38,016 crore in 2010-11, a jump of 47%. In comparison, its profit has moved up only 24% from `6,244 crore to `7,717 crore.

In effect, the companies have lost the ability of raising rates, which is affecting their margin expansion. What is clear is the companies are getting less profitable.

The advent of new technology has prompted these operators to introduce new products at a higher price range. But these have met with little success. 3G, for instance, was supposed to be a game changer. But almost all telecom players are somewhat stuck after investing a sizeable amount of capital. Amid all these issues, the next generation of technology under 4G is being launched.

Bharti Airtel, which has taken the initiative and launched the first such service, has priced it at the premium end of 3G users. The company has already invested nearly Rs10,000 crore for getting the licence. However, none of the analysts are expecting any significant numbers coming in from 4G in its initial days.

The company now faces the stiffest challenge from Reliance Industries, which has acquired the licence for launching 4G services for `13,000 crore. Bharti has been a trend setter for the industry. Taking note of the writing on the wall, the company has made inroads into the African market. The share of the continent in its business operations is expected to pick up.

More importantly, markets will be keenly looking at its numbers in the Indian market. If Idea Cellular’s results are anything to go by, Bharti will have a tough time trading at such high valuations. Analysts have projected bright numbers for the company for the current fiscal, saying the company’s profit will grow 63% to nearly Rs8,000 crore, but there is nothing in the quarterly numbers that says as much.

With an overhang of peer performance and a possibility of strong headwinds in terms of policy and competition from Reliance, it is better to exit from the stock which has taken support around the Rs300 level.