Telecom stocks out of coverage area, but experts see 40% upside on Bharti Airtel, Idea

Telecom stocks are back in focus, but for all negative reasons. Reports suggesting good response to Reliance Jio's mobiles in June quarter, and trials, are already a concern for the incumbents, but analysts believe the forthcoming auction in 800 MHz band will help players such as Idea Cellular to play a catch up and get prepared for Jio's launch, slated for end-September.

Overall, both the stocks Idea and Bharti Airtel can see up to 40 per cent surge in their stock prices, they said.

Experts said the September auction may turn out to be different from the previous ones, thanks to no fierce competition on account of increased visibility on spectrum supply, and no renewal burden on incumbents. Operators may in fact refrain from front-loading spectrum investments in anticipation of future demand as spectrum supply appears huge, they said.

"We estimate potential spectrum investment of Rs 5,500 crore and Rs 7,600 crore, respectively, by Bharti and Idea. Idea's spectrum investment of Rs 7600 crore as modelled by us, if proven correct, could positively surprise the market," said ICICI Securities in a research note.

While Idea is the best play on the auction, Bharti Airtel is the preferred pick from the telecom sector, the brokerage said.

ICICI Securities sees Bharti Airtel stock to touch Rs 465, suggesting an upside potential of 24.17 per cent. For Idea, a target price of Rs 160 suggests an upside potential of 38.62 per cent.  

The brokerage JM Financial is also positive on the two telecom stocks as, it said; prevailing valuations for the stocks are below trailing 3-year average.

"Including our estimated auction-spend of Rs 7,800 crore/Rs 11,600 crore for Bharti Airtel/Idea, forward EV/EBITDA multiples at 6.3x/6.2x are currently below 3-year averages," said JM Financial.

The brokerage has raised its target price for Bharti Airtel to Rs 420 from Rs 410 earlier. It sees Idea ruling at Rs 130 from Rs 135 earlier.

Meanwhile, Reliance Jio may not participate much in the auction as it has already bought enough spectrums through spectrum sharing and trading. It is only likely to buy 1800MHz spectrum to complete its pan-India footprint.

However, to be clear, one has to wait for September 13, the last date for interested operators to submit their applications.