Shares of Bharti Airtel Ltd and Idea Cellular Ltd have risen by nearly 50-60% since September on the belief that a reduction in competitive intensity will soon lead to an increase in tariffs. News reports now suggest telecom companies have been successful in increasing net realizations by reducing discounts as well as the validity period of prepaid vouchers.
Airtel shares rose by 4.5% on Wednesday, while those of Idea Cellular gained 4% intraday before giving up most of the gains. Typically, investors buy on rumours and sell on news. With telecom stocks, they bought not only based on expectations that tariffs will increase, but are continuing to buy on the news that this has actually happened.
What’s more, the impact on revenue and profit seems to be overestimated. According to an analyst with a domestic institutional brokerage firm, it’s not possible to determine the expected increase in realized rates, based on the details currently available; and so one will have to go with Bharti Airtel’s informal guidance (to the analyst) that rates will likely increase by 2-4% as a result of the reduction in discounts.
It’s naive to assume that aggregate voice revenues will increase by the same extent. It still remains to be seen how recent pricing measures will impact usage. Besides, it’s still not clear if they are sustainable. In mid-2011, the industry had attempted to raise tariffs, but had to quickly roll them back.
And even if voice revenues increase by 2-4%, not all of it will flow right until the bottomline. This is because telecom companies have to bear higher input costs—for instance, diesel—as well as a number of regulatory charges. In addition, the new rules for value-added services are likely to impact revenues from this source, besides which roaming charges are also likely to decline. Another analyst with a domestic institutional brokerage firm says that the tariff increases should be seen largely as ‘compensatory’, to offset the increase in costs.
Clearly, things aren’t as rosy as the 50-60% rise in telecom stocks in the past five months suggests. It’s also far-fetched to assume that competitive pressures have disappeared. Uninor continues to be aggressive in the six circles it still operates in and these circles account for 40% of the industry’s revenues.
This is not to question the entire rally in telecom stocks, which began in early September on the back of news that telecom companies had cut dealer commissions, and gained steam in end-October after the subdued response to the government’s spectrum auction. There’s little doubt that average realized tariffs will inch up gradually. But given the concurrent increase in costs and the fact that regulatory risks persist, the rally looks overdone.