Bharti Airtel Ltd’s shares were the biggest losers on Wednesday among the 50 stocks of the Nifty index on the National Stock Exchange. In the past two trading sessions, the company has lost around 5% in value. It was about time investors booked profit, what with the stock having gained nearly 16% from its low in end-August and reached the 280 levels.

The company’s shares benefited from the improvement in investor sentiment this month owing to the government’s reform measures. Besides, investors are also excited about the possible listing of its tower arm, Bharti Infratel Ltd, which filed its draft prospectus this month. A large part of the rally, however, seems to have been driven on the back of news flow that indicated price competition is easing. Bharti itself told some investors that it has cut dealer commissions since August, which was followed by tariff hikes in two circles by Idea Cellular Ltd, and then by Reliance Communications Ltd last week.

But while cut-throat price competition might have reduced, it’s unlikely tariffs will increase meaningfully anytime soon. Bharti hasn’t made any move on the tariff front, and as long as the market leader maintains prices, other firms will be forced to march in tandem to protect market share. The looming entry of Reliance Industries Ltd, either by participating in the upcoming spectrum auction or through an acquisition, will also keep tariffs under pressure. News reports that Reliance participated in the government’s pre-auction meetings have increased these concerns.

In this backdrop, it was foolhardy for investors to bid up prices of Bharti to just touching distance of its pre-June quarter earnings announcement levels. And this was notwithstanding the fact that subscriber addition rates have slowed and the sector is up against additional regulatory challenges such as the possible abolition of roaming charges.

The outlook for the September and December quarter results is also bleak, what with subscriber addition having slowed and with seasonal factors expected to hit minutes of usage. Besides, with Bharti leaving tariffs unchanged, the trend in revenue per minute can’t be expected to offset the drop in volume growth.

In the December quarter, telecom companies will also have to contend with an increase in diesel costs. It’s quite likely shares of Bharti may be in for some correction at the time of its earnings announcement. After its June quarter results announcement, the company’s shares had fallen by 13% in just two trading sessions.

As far as the Infratel listing is concerned, it’s important to note that there won’t be any cash inflow into the parent company. The issue is largely a fresh issue of shares, which will help the tower company cut some of its debt. Having said that, there is likely to be a slight increase in the value attributed to the tower assets in Bharti’s sum-of-parts valuation, depending on the market-discovered value of the tower company.

As analysts at Citigroup said in a note to clients, “Infratel’s underlying business strength (predictable earnings) has started to get drowned by the competitive noise in the domestic wireless front. Therefore, the listing should help improve Infratel’s ‘value’ visibility apart from reducing some debt."

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