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Telecom stocks are back in favour

Telecom stocks are back in favour
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First Published: Sun, Jul 10 2011. 09 09 PM IST
Updated: Sun, Jul 10 2011. 09 09 PM IST
Investors don’t seem to be getting enough of telecom stocks. Even though the market has corrected by about 10% from its high in November, shares of incumbent telecom operators Bharti Airtel Ltd and IdeaCellular Ltd have risen by 21% each since then.
In the past eight months, they have outperformed the market by as much as 35%. To be sure, the recent outperformance comes after a massive underperformance of 47% and 61%, respectively, by Bharti and Idea shares in the preceding three years.
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Even so, it’s important to note that last week, both stocks, Bharti and Idea, crossed crucial levels of Rs 400 and Rs 80, respectively. So what’s with the recent enthusiasm for telecom shares?
For one, the competitive intensity in the industry has come down considerably. In fact, late last month, there were reports that Tata DoCoMo increased tariffs selectively. It increased its local SMS tariffs by 67% and national SMS tariffs by 25%. And while it has maintained call rates, its new tariff plans include a provision to increase long-distance call rates from the second year of subscription.
Considering that the industry has been reeling under the pressure of a sharp decline in call rates for almost three years now, news of an increase in tariffs has come as a welcome break. Besides, new firms such as Uninor have become less aggressive with their client acquisition strategies, which has also provided relief to incumbent operators.
Interestingly, in April and May, subscriber additions by wireless operators have declined to roughly 16 million and 13 million, respectively, down from an average of around 20 million in the preceding three months. But some analysts are seeing this as a positive sign for incumbent operators, since it signals less aggression from newer operators.
Also, mobile number portability, which has been operational for a few months now, hasn’t resulted in much churn among operators.
Given these factors, the decline in tariffs is expected to abate and earnings growth is likely to pick up. Idea has already reported impressive earnings growth in the preceding two quarters. Shares of Bharti and Idea have also benefited from the fact that their names have either been cleared or haven’t come up extensively in the ongoing second-generation (2G) spectrum scam.
But while these telecom stocks have much going for them currently, investors shouldn’t forget that investing in the sector involves relatively higher regulatory risk. Besides, valuations have become rich. Both Bharti and Idea trade at around 8-8.5 times on the enterprise value to Ebitda (earnings before interest, taxes, depreciation and amortization) basis, using estimated earnings for fiscal 2012.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Sun, Jul 10 2011. 09 09 PM IST