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Telecom stocks crash on TRAI plan: What to do? - Views on News from Equitymaster

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Telecom stocks crash on TRAI plan: What to do?

Oct 6, 2009

Telecom stocks, led by Bharti Airtel, Reliance Communications, and Idea Cellular, have crashed today. All these stocks were down around 12% each at the time of writing. The reason for this fall? Well, the Telecom Regulatory Authority of India (TRAI) proposal of asking telecom companies to compulsorily offer per second billing to their customers. What this simply means is that, when the proposal actually becomes a rule, mobile users will be charged on the number of seconds they make a call for and not for the entire one minute as they are charged now. While this plan of TRAI, when and if implemented, will mean lower mobile bills for customers, it would mean lower average revenue per user (ARPU) for telecom companies. And thereby a decline in overall revenues.

While TRAI has not finalized a date for the roll-out of such a tariff plan by telcos, this move is surely a dampener for existing mobile companies like Bharti who are already facing competitive tariff pressure from other players in the industry, especially the new companies that have recently come into the fray. As a matter of fact, private sector mobile operators like Tata DoCoMO and Aircel already offer the per-second billing plans to their subscribers. Now with bigger players also likely to come into the fray courtesy the TRAI, the price-based competition within the telecom sector is going to intensify even further. And that is bad news for all companies, especially in the short to medium term.

Readers would do well to note that other big players like Reliance Communications are already fighting the price war with Bharti, with the former aggressively spreading its GSM services nationwide since the past few quarters. We have also heard Bharti’s management indicating that they were not really worried about Reliance’s aggressiveness given that the latter is not getting the right kind of subscribers using its price based offerings. But the per-second billing plan as proposed by TRAI must have really caught Bharti off guard.

Again, while the company’s management has not shown its displeasure to falling ARPUs in the past as it was continuously growing the subscriber base, we need to hear their views on the per second billing plan to assess the kind of impact their revenues might feel owing to this.

What to expect?
At the current price of Rs 355, Bharti’s stock is trading at a multiple of 10.9 times our estimated FY12 earnings. This we believe makes the stock really attractive for long term investors. While we still need to assess the exact impact of this TRAI proposal which in itself is still to be finalized, we do not see it impacting Bharti’s long term business plans and prospects.

We had recommended the stock in May 2009 and continue to stand by our recommendation. Investors can use the current volatility in the stock to add more of it to their portfolios.

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