Sanjay Chawla of JP Morgan gives his views on the telecom sector. According to him, the fair value target price for Idea is Rs 90. He see 50 per cent Ebidita (earnings before interest, tax, depreciation and amortisation) growth for Idea in FY08, and 30 per cent in FY09. He feels that the ADC (access deficit charge) rate cut could boost Videsh Sanchar Nigam's margins by 30-40 bps. JP Morgan is underweight on Mahanagar Telecom Nigam, as there is no hard evidence of growth.
Chawla believes that Bharti's price reflects subscriber growth for the next year. Also, the cut in licence fee and the demerger of the tower business will unlock value in Bharti.
He also states that Vodafone's entry into the telecom sector is negative for it, but not for Bharti, Reliance Communication and Idea.
Excerpts from CNBC-TV18's exclusive interview with Sanjay Chawla:
What are your views on Idea because that has been listed recently and there is a little bit of a debate on how it is valued relative to its peers? What do you think?
First of all, Idea is still a new company. Overall we like the company and its position in the market that it operates in. We expect the company to grow at similar growth rates to Bharti, at least in the medium term.
However, our view is that we should still give a discount to Idea relative to Bharti, because of its smaller size and footprint and also slightly weaker balance sheet. So a 10 per cent discount to Bharti would be an appropriate valuation benchmark for Idea Cellular.
What is your fair value estimate there, given the kind of earnings estimates that you have?
Our fair value target price is Rs 90 per share and we expect 50 per cent EBIDITA growth for Idea this year in fiscal 2008, while for 2009 we see 30 per cent growth.
How have you read the changes in access deficit dharge, or ADC and fundamentally, what is the call on VSNL?
We have been recommending VSNL to patient investors, especially at the levels at which, it fell recently below Rs 400. I think at Rs 350 per share, there was no real value, being reflected in the share price. Land could account for as much as Rs 200-250 per share of upside from Rs 350.
So now, with the positive news flow on land, I think the stock has reacted positively, in addition to which, the positive impact of ADC, could help the EBIDITA margins by 30-40 basis points in the coming quarters.
Are you concerned for many of these mobile companies by what you saw this time in the monthly figures or do you take it as a subscription blip that will get corrected?
I think it is the CDMA (code division multiple access) operators, which really disappointed a bit more. Otherwise, if you look at the overall performance of the GSM operators, the monthly net figures were down just 2-3 per cent, month on month and February has 10 per cent fewer days than January.
So a correction of the order of 10 per cent was anyway expected. So viewed in that light, I think the performance was pretty encouraging. I expect the growth rates to continue about 6 million per month in the coming quarters.
Any thoughts on MTNL at all?
We have an underweight recommendation on MTNL. Although the fixed line business is showing signs of stability, the hard evidence of a growth, which is what the stock price is implying, is not there currently. So I think we will wait for the valuations to come off or for better execution on the broadband and mobile side to become more positive on MTNL; right now we are underweight.
Broadly, what is your call on the kind of valuation parameters that some of these mobile companies trade at? Do you find them excessively valued or are they okay?
If you look at the current valuations of Bharti, which is really a bellwether stock, the stocks valuations are 13-14 times one year forward EV/EBIDITA and that is all time high valuations. In the last three years, we never saw the stock really breaking out from a 12 times EV/EBIDITA multiple. But in November, it did break that barrier and today it is 13-14 times.
I think at current valuation, the stock price is already reflecting much of the subscriber's growth that is anticipated in the next one to two years. However, what is still not in the stock price is really a potential cut in the license fee, which can add 7-8 per cent more to the stock price and also the value unlocking possible from the tower company hive-off and infrastructure sharing. So these are long-term upsides, which are still not there in the valuations. But from a near term subscriber growth perspective, I think the stocks are reasonably valued at 13-15 times EV/EBIDITA.
What are you market checks indicating because of the Hutch Vodafone tie-up now? Is anything going to change in the competitive landscape or in terms of pricing?
Our view is that the entry of Vodafone will be incrementally negative for the sector, not necessarily for the bellwether stocks like Bharti or Idea or even Reliance for that matter. If you look at the price that Vodafone has paid - that is 25-30 per cent premium to Bharti's valuations, they have assumptions, which they spelled out to justify the valuations.
They are talking about 20-25 per cent subscriber market share in the next five years and they also want to accelerate the capex. So from that angle, if they have to achieve anything in excess of 20 per cent market share, they would have to take away market share from players like BSNL or even some of the smaller GSM operators like Spice or Aircel. So I think it is incrementally negative for the sector, but not really for the big boys like Bharti, Reliance or even Idea.
Any disclosures?
We have no positions in any of the stocks that I have talked about.
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