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Sensex Trades on a Volatile Note; Idea Cellular Plunges 6%
Mon, 25 Jun 12:30 pm | Parth Parekh, TM Team

After opening the day flat share markets in India are trading on a dull note and are presently trading marginally below the dotted line. Sectoral indices are trading on a mixed note, with stocks in the IT sector and stocks in the pharma sector witnessing maximum buying interest.

The BSE Sensex is trading down by 80 points (down 0.2%) and the NSE Nifty is trading down by 22 points (down 0.2%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading down by 0.2%. The rupee is trading at 68.15 to the US$.

In news from stocks in the telecom sector. Idea Cellular share price was in focus today after it was reported that the Department of Telecom (DoT) is looking to raise a fresh demand of Rs 47 billion before it approves the merger.

Reportedly, the DoT insists on a Rs 47 billion towards one-time spectrum charges after Vodafone merged its entities in India, as a precondition to approve its merger with Vodafone India. This is set to delay the merger processes.

In 2015, Vodafone had merged its four subsidiaries Vodafone East, Vodafone South, Vodafone Cellular and Vodafone Digilink with Vodafone Mobile Services, which is now called Vodafone India.

Both Idea and Vodafone were expecting the merger deal to create India's largest telecom company to be completed by June 30, 2018.

Notably, Vodafone India and Idea Cellular merger is set to create India's largest telecom operator, surpassing Bharti Airtel Ltd. The top operator will have a revenue market share of around 37% and over 433 million subscribers.

The two companies were set to start operating as one entity from July 1 and for that to happen, the merger proceedings must be completed this month. Idea has called an extraordinary general meeting on June 26 to consider the proposals, including changing the name of the merged entity and raising funds of Rs 150 billion through debentures.

It will be interesting to track the progress of the new telecom leader, and whether it can sustain the pole position, in the hyper-competitive telecom industry.

At the time of writing Idea share price was trading down by 6%.

The entry of Reliance Jio and the fierce tariff war it has triggered has set off brisk activity in the telecom industry for fundraising and consolidation, as the incumbents look for ways and means to fend off the competition.

Telecom Sector: A decade of Underperformance

Note that the whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

Telecom companies are straddled with high debt, intense competition, and lack of pricing power. High spectrum costs and regulatory issues have hampered the sector. While consumers have benefited from low costs and new players fighting for their share, investors have suffered.

With the entry of Reliance Jio, the competition has intensified further. Reliance Jio's low cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Moving on to news from stocks in the auto sector. Tata Motors share price is in focus today as the US threatened to impose new tariffs on European cars.

US President Donald Trump had on Friday threatened to escalate a trade war with Europe by imposing a 20% tariff on all US imports of European Union-assembled cars.

Tata Motors' subsidiary, Jaguar Land Rover (JLR) manufactures vehicles in the EU.

JLR vehicles exported to the United States to take a big hit if Trump imposes auto tariffs. JLR, Britain's biggest automaker, is the company's largest business which contributed nearly 77% to Tata Motors' total revenue in the year ended March 31, 2018.

At the time of writing, Tata Motors share price was trading down by 3.8%.

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