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Telecom stocks may not be that defensive

Telecom stocks may not be that defensive
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First Published: Wed, Aug 24 2011. 10 24 PM IST
Updated: Wed, Aug 24 2011. 10 24 PM IST
Telecom stocks have done relatively well in the recent market correction. Since 26 July, while the benchmark Nifty of the National Stock Exchange has corrected by around 14%, shares of Bharti Airtel Ltd fell at a lower rate of about 7.6% and those of Idea Cellular Ltd actually rose a bit.
Shares of RelianceCommunications Ltd, which is saddled with huge debt, behaved differently, falling by about 26.5%.
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Can investors expect similar resilience from telecom stocks in the event of a further correction? In other words, will an investment in telecom stocks be a good defensive bet in a volatile market? While this could be so, investors shouldn’t take it as a given.
The main reason telecom stocks did well in the recent decline was that companies were able to raise tariffs for the first time in around two years. This led to earnings and target price upgrades for telecom stocks.
While the development is without doubt a positive for the industry, it remains to be seen how the move will affect volumes, and whether tariffs can be raised further.
More importantly, the inherent regulatory risks in the industry cannot be wished away. As a recent report by Kotak Institutional Equities points out, “We still see risks from a potentially unfavourable regulatory environment—1) one-time charge for excess spectrum above 6.2 megahertz, 2) charge for licence renewal, and 3) lower inter-connection (termination) and roaming charges.”
The brokerage has a “reduce” ratings on both Bharti and Idea, even after increasing its earnings estimates for the two firms after the recent tariff hikes. Given the above-mentioned risks, it may not be wise to rely on telecom stocks as defensive bets.
Besides, since consumer-oriented stocks have already outperformed this year and trade at expensive valuations relative to the market, the chance of continued outperformance is slimmer.
And if, as many analysts believe, interest rates peak soon, investors will clearly prefer rate-sensitive stocks to defensives.
Graphic by Yogesh Kumar/Mint
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First Published: Wed, Aug 24 2011. 10 24 PM IST