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Telecom: The rising! - Views on News from Equitymaster
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  • Dec 28, 2006

    Telecom: The rising!

    The great Indian telecom story surged ahead during 2006, with even more vigour than what was seen in 2005. The base fuel for the growth of the industry in 2006 was the swelling subscriber base. The targets for mobile subscribers were met ahead of deadlines. Encouragingly enough, a larger share of these numbers was seen coming from non-metros. And in October 2006, when the India mobile telecom industry set a world record for the maximum number of monthly addition (6.6 m), the maximum growth was recorded in circles 'B’ and 'C' (78% of the new GSM subscribers were from these circles). This vindicated our stand on the sector as was outlined by our view at the end of 2005.

    The impressive performance in 2006 would not have been as superb, but for the efforts of the regulatory authority and the drive of telecom operators. The year saw the roll out of a host of regulations that built up healthy competitive markets. The private players, on their part, left no stone unturned in capitalising on the growth opportunity.

    The sector outperformer
    Against the BSE Sensex's gains of 44% YoY during 2006, the telecom index (inclusive of stocks like Bharti Airtel, MTNL, VSNL, HFCL, Tata Teleservices Maharashtra, Krone Communications, Avaya Global Connect and ITI Limited) had a dismal performance, registering a decline of 11% YoY. The poor performance of the mid-cap telecom (and related) companies weighed heavy on the telecom index. In fact, there were only three gainers from the sector - Bharti Airtel, HFCL and Reliance Communications (we have not included Reliance Communications in the index as the stock was listed on March 6, 2006).

    Now, when we compare the stock price performance of the top gainer from the telecom index - Bharti Airtel - with Reliance Communications during the period of March 6 2006 to December 22 2006, the latter has emerged as the outperformer. Against Bharti's gains of 51% during this period, Reliance Communications gained by over 61%. Strong operational performance over the past three quarters combined with the narrowing gap in terms of investor preference (over Bharti) has led to this outperformance from Reliance Communications during the said period.

    Especially on the valuations front, against an EV/Subscriber gap of US$ 148 between Bharti and Reliance in March 2006 (when the latter was listed), the range has narrowed down to US$ 72 in December 2006. We had been talking of a reducing 'scarcity premium' for Bharti (in terms of valuations) as more telecom players are listed, and the same was vindicated in its stockmarket return comparison with Reliance Communications during 2006.

    Strong gains in Reliance were also a consequence of the louder noise emanating from the company about its intentions of making an aggressive foray into the GSM mobile space. The company already operates its GSM services in 8 circles and plans to have a nationwide presence, either on its own or through an acquisition. Currently, it is involved in the run-up to one of the biggest telecommunication deals in the history of Indian telecom industry (buyout of Hutchison Essar, India's fourth largest mobile services operator).

    Telecom: Key gainers in 2006
    (Rs) 22-Dec-05 22-Dec-06 Change
    Bharti Airtel 356 611 72.0%
    Reliance Communications 291 # 469 61.2%
    HFCL 19 23 20.3%
    VSNL 416 406 -2.4%
    MTNL 145 139 -4.3%
    Krone Communications 226 145 -35.8%
    Tata Tele Maharashtra 30 19 -38.1%
    ITI 75 44 -41.1%
    Avaya Global Connect 484 210 -56.5%
    # Stock price as on March 6, 2006

    What to expect in 2007
    The year 2007 is expected to be one of great expectations. The record-breaking addition of new subscribers that India was able to attain during the closing months of 2006 (net addition of over 5.5 m new subscribers per month) is not likely to be a one-time phenomenon. We believe that the Indian telecom story is likely to remain intact over the medium to long term. This can be gauged from the future plans that the companies have lined up for capacity expansion. A case in point was the recent floating of the largest tender for telecom equipment by Reliance Communications for a capacity addition of 75 m GSM lines (which might be shelved if the company is able to acquire the assets and subscribers of Hutch-Essar). Also, with sustained efforts on the part of the regulator to usher in better infrastructure and higher competitive markets by way of regulatory changes and availability of cheaper handsets, the penetration rates are expected to increase further. The coming year should also see higher inflow of FDI in the equipment manufacturing facilities, backed by sustained efforts from the government.

    A parting note…
    The die has been cast, with the biggest consolidation slated to happen in the telecom industry, most likely during the first quarter of 2007. Though the broader outlook is positive, a greater amount of clarity on the ADC issue should see more subscriber additions for mobile services players. What is, however, worrisome is that although the mobile sector has set the stage on fire time and again, other segments (especially Internet and broadband penetration) have been consistently lacking not just in growth but also in meeting the basic targets. The telecom market in India, owing to its sheer size, offers enough scope for more players in various segments. What is however, needed is a speedier pace of reforms to stimulate this growth potential.

    To read our thoughts on year 2006 and our view for 2007, click here - Reflections 2006.



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