BackUncertainty hangs over telecom stocks
Drop in share prices of Airtel and Idea suggests that investors are bracing for some impact from Reliance's entry
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Reliance Jio Infocomm Ltd’s reported interest in the upcoming spectrum auction has led to a 6-8% drop in the share prices of Bharti Airtel Ltd and Idea Cellular Ltd. A day after news emerged that Reliance had deposited earnest money with the government for bidding in the auction in February, analysts at Credit Suisse downgraded both Bharti and Idea.
Others have said that the drop in the share prices of the two incumbent firms is overdone and that it is highly unlikely that Reliance Jio will cause a major disruption in the industry. Analysts at Citigroup Research said in a note to clients, “We believe these concerns are overstated given 1) the low probability of Reliance Jio participating in the 900MHz band; 2) undercutting voice tariffs is difficult unless Reliance Jio is willing to sell below cost; and 3) while Reliance Jio is likely to participate in 1800MHz auction, winning price being linked to incumbents’ renewals should keep bidding intensity in check."
But the drop in share prices suggests that investors are bracing for some impact from Reliance’s entry. According to one analyst at an institutional brokerage, with mobile penetration already at very high levels, Reliance Jio might look to adopt an aggressive and disruptive strategy because incremental growth will not amount to anything significant. Offering voice services on the 1,800MHz band, according to him, won’t offer a compelling proposition for subscribers to shift from existing operators, while offering data services on the 900MHz band, which is being auctioned in the metros, can cause a shift.
In this regard, Bharti Airtel is clearly better placed than Idea. Given its relatively better balance sheet strength and presence across 900MHz and 2,300MHz spectrum (for 4G services), it is better placed to compete with Reliance Jio even if the above strategy is adopted. It is little wonder Idea’s shares have fallen at a faster rate in the past few sessions.
But truth be told, investors can at best guess what Reliance Jio’s strategy will eventually be. The only thing that can be told with certainty is that until the auction results are known, the uncertainty about Reliance’s plans will continue to cause an overhang over telecom stocks.
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