Telecom companies to confront new challenges next year

Telecom companies to confront new challenges next year

India’s leading telecom stocks, Bharti Airtel Ltd and Idea Cellular Ltd, have underperformed the markets in recent weeks after a strong outperformance for most of this year. The stocks had done well earlier mainly because of the halt to the trend of tariff declines. For the first time in a very long time, telecom companies took a price hike, something that evidently had investors enthused.

Going into 2012, one of the key factors investors will look for is the impact on volumes. Another factor to look out for is the growth in the usage of 3G services. Thus far, demand hasn’t picked up as well as companies had hoped or investors had expected. This means that companies may have to reduce tariffs in the data segment and increase spending on marketing. And with the rupee having depreciated sharply, these companies will be impacted because of their net forex exposure.

In a recent report, analysts at Motilal Oswal Financial Services Ltd said, “we downgrade Ebitda estimates for Bharti/Idea by 2-5% and target prices by 7-10% led by (1) lower visibility on near-term margin expansion despite the companies entering seasonally strong period, (2) poor 3G uptake which will likely lead to higher marketing spends and data tariff cuts, and (3) likely higher competitive intensity within the top three operators." Ebitda is short for earnings before interest, tax, depreciation and amortization.

The industry is headed into the new year with some challenges. Having said that, the good news is that the days of cut-throat price competition seem to be over.

Another factor investors will look out for is more clarity from the regulator, especially on factors such as spectrum pricing and merger and acquisition regulations.