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Telecom stocks to underperform; buy only on big correction: analysts

Aprajita Sharma / New Delhi 19 Jun 17 | 10:17 AM

Telecom companies have been reeling under pressure ever since Mukesh Ambani’s telecom venture Reliance Jio launched its services in 2016, disrupting the sector by offering freebies and eating into the market share of listed telecom players.


Telecom stocks like Idea Cellular and Reliance Communications have lost 18% and 64%, respectively since Ambani announced the launch of RJio on September 1 last year. Bharti Airtel, however, rose 10% during the same period against over 9% gains in Sensex.

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In FY17, the combined average revenue per user (ARPU) of the incumbent telcom operators fell by 20%. 


In terms of financials, Idea posted a net loss of Rs 399.4 crore in the financial year, while Airtel’s net profit fell 30% in the year on the back of falling revenues as well as margins. Anil Ambani-owned Reliance Communications also posted net loss of Rs 1285 crore in FY17. 


Analysts believe the sector will take one-two years before it shows any signs of a recovery. One can look for some big correction before entering the sector, they suggest.


“If one can patiently hold for the next 3-4 years, the better performing telecom stocks should be bought on a correction," said Ambareesh Baliga, an independent market analyst.


“Even those telecom players which are still able to show decent bottom lines cannot justify continued capex spends based on their operating cash flows. Therefore, for any telecom company, the moat would be spectrum combined with quality of customer service which will lead to a higher and sticky customer base. Bharti Airtel would figure high on that," he added.


G Chokkalingam, founder, Equinomics Research and Advisory also believes it would take another year or two for the telecom industry to overcome fierce competitive battle and get back to stability in the operating margins.


“Hence, the sector as a whole would underperform the markets. Therefore, investors can look for opportunities elsewhere, he said.


Meanwhile, the telecom industry’s debt burden now stands at a whopping Rs 4.6 lakh crore. 


A recent Credit Suisse report stated that the share of the telecom sector in Rs 14.5 lakh crore stressed assets with banks has now increased to 12% (from 10% in Q3FY17). 


In April, the RBI had also expressed concerns over the exposure of banks to the telecom companies, advising them to review the debt level of the telcos by Q1FY18, whose interest coverage ratio has gone below one.


Interest coverage ratio is a multiple to determine how easily a company can pay their interest expenses on outstanding debt.


Given the ongoing consolidation in the sector, Baliga sees an oligopoly of just about three players who are likely to encash gains from the data hungry market.


“One needs to be decently sure that their stock pick would figure in the final top three tally as I see the surviving telecom giants would be touching every aspect of customer lives through data services which finally would be the “life line" for any individual, thus being categorised as “essential service" at a commercial price," said Baliga.

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