Shares of incumbent telecom operators such as Bharti Airtel Ltd and Idea Cellular Ltd have benefited immensely from the recent bounce in the markets. Stock prices of the two large operators have risen by 13.9% and 13%, respectively, from their lows in mid-March. Shares of Reliance Communications Ltd (R-Com) underperformed both peers and the market during this period. But that’s largely because they had already risen considerably between end-February and mid-March. On a year-till-date basis, R-Com shares continue to underperform by a large margin.
But the stocks of the incumbent operators (in the GSM space) have marginally outperformed the market. Telecom stocks seem to be back in favour with investors, despite all the talk about the regulatory overhang the sector faces.
As far as companies such as Bharti, Idea and Vodafone Essar Ltd are concerned, it’s important to note that they are largely unaffected by the controversy over the second-generation spectrum allocation. The investigations are largely focused on companies that got new licences.
If anything, the outcome of the investigation will be positive for the incumbent operators. It could lead to some companies either surrendering the spectrum or becoming willing to sell their licences, spurring consolidation.
Already, the new operators have stopped making large fresh investments, which has checked the increase in supply in the sector. The decrease in competitive intensity has already led to better financial performance by large incumbent operators. The outperformance of telecom stocks in 2011 is mainly to reward this improvement in performance compared with last year. Analysts are even tempering down their estimates of by how much average tariffs will fall in the medium term.
This is not to say that the incumbent operators are completely redeemed from the regulatory overhang. The pricing of spectrum given to them in the past is still unresolved. The recommendations of the Telecom Regulatory Authority of India were clearly negative in this regard. The current market expectation is that the proposed guidelines for pricing spectrum may get diluted, but the uncertainty should keep a check on telecom stocks.
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