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There's a lot going on in the telecom sector. The present state of affairs state suggest that the sector is certainly in for a rough ride. It is indeed facing an unprecedented situation.
The small players in the sector are facing the brunt after Reliance Jio's entry into this space. To catch up with the competition, many players have started offering similar services. But the aggressive pricing has not helped the overall health of these telecom companies.
Further, higher investments to upgrade infrastructure had stretched their balance sheets in the past. Also, the regulatory costs for the industry have shot the through the roof. After 122 licenses were cancelled by the Supreme Court, the new spectrum airwaves were auctioned off at exorbitantly high prices pushing telecom companies neck-deep in debt.
The troubles don't end here. Apart from the competitive and regulatory pressures, the industry has its big share of financial problems. We came across an article in the Business Standard which shows how telecom, India's youngest industry, is now the most vulnerable, financially.
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A peek behind the books will show the combined return on equity (RoE) for listed operators declining substantially over the past few years. The combined RoE for listed operators declined to 5.6% in FY16, as against 11.7% in FY14. The same is estimated to have turned negative during the first nine months of FY17.
Along with that, the combined debt to equity ratio of the five listed telecom operators zoomed to a record high of 2.2 times at the end of FY16. The same stood at 0.5x in FY10 and 1.7x at the end of FY15.
As per the quoted article, for the first time in history, the listed operators' debt now exceeds their market capitalization. That has technically made the industry insolvent.
The saga continues in FY17 as well. The combined debt for listed operators rose 27% during the first half of FY17 as compared to the corresponding period last financial year. This further led to an increase in interest costs by 32% YoY during the first nine months of FY17.
All this had led to some consolidation in the telecom sector. In the long-run only four or five players in the industry will survive. Unfortunately, the survivors won't be able to generate enough profits to create long-term value for their stakeholders. Hence, we see no reason to change our negative stance on the sector.
You can check the financial health of telecom companies by running a query in the Stock Screener section. This gives you the option to run a sector-wise query for top 10 stocks.
Also, Apurva Seth, at Profit Hunter, took a look at the telecom sector recently. And it doesn't look good. Here's Apurva's conclusion after studying the charts...
If you want to know more about which stocks to keep on radar and which to avoid, it's worth reading Apurva's piece in its entirety.
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