Experts say going ahead data price will fall further due to competition
Developments related to Reliance Jio’s freebies and the new rates effective April 1, 2017, possibility of the Vodafone-Idea Cellular merger, and Bharti Airtel’s acquisition of Telenor India have kept the telecom stocks buzzing over the past few months.
While the S&P BSE Sensex has gained around 12 per cent from its recent low in December 2016, the S&P BSE telecom index has rallied nearly 24 per cent since then.
However, the rally in individual stocks has been much sharper. Reliance Industries (RIL), for instance, rallied nearly 11 per cent on Wednesday after its telecom unit, Jio Infocomm, announced it would start charging customers for its mobile offering, Reliance Jio (RJio).
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 per cent to its 52-week high of Rs 397, after the company announced plans of buying Telenor (India). The stock, however, settled 1.5 per cent higher at Rs 366.
“Consolidation in the telecom space is reaching peak levels. Given the likely price wars ahead, it is the consumer who will be the ultimate beneficiary. As regards RJio, the uncertainty in terms of pricing and customer base has gone.
As a result, we know the average revenue per user (ARPUs), subscriber base, etc each incumbent will have. Going ahead, there will be three key players - Bharti Airtel, Jio 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, analysts now remain cautious, as they anticipate incumbents to realign their offerings to compete with RJio.
The aggressive pricing model of RJio is expected to put further pressure on realisation and subscriber acquisition costs for incumbent players. Stability in the competitive environment is one of the most important aspects for profitable growth, analysts say.
“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 says.
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 per cent.
“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.
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 and managing director of Equinomics Research & Advisory, too, advises exiting the telecom stocks at the current levels.
“Given that, going ahead, telecom players will drive much of their revenues from data, 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.
Photograph: Radu Sigheti/Reuters