JM Financial ASK Securities expects policy issues to keep telecom stock prices volatile in the near term.
The Indian telecom industry is at the cusp of significant policy changes — for both spectrum allocation and new mobile licensing. Amidst pressure from existing GSM operators for more spectrum, applications for new GSM licences started pouring in over the past few months. These included both existing CDMA operators as well as newer players. This interlude brings with it the twin uncertainties of the final outcome on the spectrum allocation issue as well as its time frame. Finalising on a new policy will be complicated. While existing operators clamour to enforce their contractual obligations, policies do not constrain new competition. Hence, the policy conundrum continues to cast its shadow on the otherwise fundamentally and structurally strong Indian telecom sector.
Near-term stock prices of telecom companies are likely to remain volatile. Besides, falling tariffs amidst increasing competition would protract payback periods, thereby necessitating very deep pockets and investor patience for profitability. We recommend buying into safer, long-term bets, namely Reliance Communication (RCom) and Bharti Airtel, as we believe that their size and operating experience has enabled them to build a critical mass that is unbeatable. They are relatively more immune to policy changes when looked at in totality.
Bharti Airtel: It is India's largest GSM services provider with a market share of 23.4%. The company's pedigreed management bandwidth, backed by a decade long track record of delivering performance, provides tremendous comfort. In addition, the company's transparent approach to financial disclosures lends credibility, which, in turn, has a direct bearing on the company's valuations. The enterprise value (EV) is 16 times 2007-8 EBITDA and 12 times 2008-9 EBITDA. We initiate coverage with a Buy rating and a target price of Rs 1,465.
Reliance Communications: RCom's integrated nature of operations holds embedded value, case in point being the recent 5% stake sale of the tower division. The other opportunities that are likely to witness value unlocking are FLAG, BPO and land surpluses. Given the stronger rupee, RCom is likely to benefit on account of translation gains. The EV is 19.5 times 2007-8 EBITDA and 14.7 times 2008-9 EBITDA. We initiate coverage with a Buy rating and a target price of Rs 934.
MTNL: The company has serious financial disclosure concerns. Every year auditors' qualifications in MTNL's annual report run into pages. Auditors have now started qualifying its quarterly results as well. Constrained by its public sector status, the company lacks operational freedom. MTNL's employee costs constitute 37% of revenues as against 8.1% for Bharti. We initiate coverage with a Sell rating and target price of Rs 138.