Buy, Sell Or Hold? Telecom Stocks Ringing Loud

Shares of telecom players Bharti Airtel and Vodafone Idea have been soaring since they released their September quarter results on November 14.

Shares of Bharti Airtel jumped nearly 7 percent to hit its fresh 52-week high of Rs 435.95 while Vodafone Idea surged 30 percent to the intraday high of Rs 5.80 on November 19.

Even as they reported a mammoth cumulative loss of Rs 74,000 crore for the second quarter of the financial year 2010, at first glance, the market appears to be riding the hope that the tide will change for these telecom stocks.

The hope was bolstered after reports emerged that the government is keeping a close eye on the sector and may announce some sort of relief for the beleaguered sector.

Meanwhile, both companies decided to increase prices with effect from December 1, 2019, but have not disclosed the amount of hike.

Such developments along with positive reports are hemming around, indicating a change in the scenario for the sector. So, is it the time investors should rethink their strategy for the sector?

It is too early to do so, say experts.

While most brokerages and experts agree that the decision of price hikes by the incumbents is a positive development, they raise finger on the ambiguity on the quantum of price increases.

“Will this be another false positive on pricing like the two rounds of price increases taken by Jio in H2CY17 turned out to be,” asks Kotak Institutional Equities.

TRAI’s final decision on IUC is still awaited wherein it has to decide on moving to zero or extension of the 6 paise per minute regime.

At this juncture, it is anybody’s guess how TRAI’s recommendations on floor pricing will look like. How the TRAI will balance the need for sector repair and universal access is also a question to reckon with.

“Telecom is an oligopolistic industry with only three players, holding almost the entire market. Going by economic analogy, an oligopolistic industry does not suffer massive price erosion. I beleive the situation will improve, but the kind of pain these firms are facing, whether they would rise proportionately to meet the burden is doubtful,” said G Chokkalingam, Founder, Equinomics Research & Advisory.

This doubt has a solid base when the burden is over Rs 1 lakh crore.

Airtel, Vodafone Idea and other telecom operators have to pay the government a whopping Rs 1.4 lakh crore following the Supreme Court order.

According to the latest report by PTI, Bharti Airtel faces a liability of around Rs 62,187 crore (including share of Tata Group of companies and Telenor India), while Vodafone Idea may have to pay about Rs 54,184 crore. The remaining liability is with state-owned BSNL, MTNL and some of the shut/bankrupt telecom companies.

Sameer Kalra, founder of Target Investing said major chunk of any kind of funding or price hike will go to either debt payment or legal obligations. So, it does not come to the bottom line.

He said he does not see any reason to look towards the telecom sector.

Brokerage firm ICICI direct said the waiver on AGR related payment will hold the key.

“Amid the looming liability of Rs 34,260 crore and Rs 44,150 crore for Airtel and Vodafone, respectively, we believe that waiver on AGR related payment (at least interest, penalty, etc, which forms 75 percent of dues) will hold the key. Nonetheless, VIL notwithstanding payment waiver would also need some capital infusion to stay afloat,” ICICI direct said.

Global brokerage firm Jefferies upgraded Bharti Airtel to hold from underperform and raised the target to Rs 407 from Rs 280 per share but downgraded Bharti Infratel to underperform from hold and also cut target to Rs 180 from Rs 265 per share.

The global brokerage house maintained its hold rating for Vodafone Idea and slashed target price to Rs 2.40 from Rs 8 as the company would still lose a majority of high ARPU subscribers to Bharti Airtel.

Bharti Airtel should gain 500bps market share, it said.

“We expect price increase from Q1FY21, though valuations are at 9x FY22e mobile EBITDA. We factor in a 20 percent price hike in FY21, but the risk in postpaid & enterprise keeps upside limited,” it added.

Over the medium term, the move will lead to pricing being a regulatory decision, said Jefferies which expects the government to provide a moratorium on the spectrum and AGR dues for 2 years.

While having an equalweight rating on the stock, Morgan Stanley raised target price on Bharti Airtel to Rs 410 from Rs 360 as the company is well positioned in the sector both from a leverage & strategy perspective.

In a recent report, Kotak Institutional Equities said the industry will consolidate further if the government does not offer a substantial relief on AGR liabilities, regulatory levies and potentially a floor on pricing.―Money Control