Ring! Ring! Didn’t hear it? Worry not; you will hear it ringing louder as the telecom sector is up for re-rating on the back of brokerage up gradation.
First, a look at the telecom stocks on the Indian bourses: Date: July 9, 2010 –
- Bharti Airtel up 10%,
- Idea Cellular up 12%,
- MTNL up 4%,
- Tata Communications up 4% and
- Reliance Communications up 3%.
When all the stocks of a sector move up at the same time, it is called re-rating of the sector prospects. In this case, the telecom sector – which was pummeled at a depressing low triggered by intense price wars amongst the over-crowded telecom operators – may well be witnessing a rating upgrade.
The refreshing upsurge comes on the back of re-rating of the telecom stocks by the financial services firm Credit Suisse citing improved environment. The report says:
“Competitive environment is improving with headline tariffs stable over the past eight months. High 3G payouts have crimped ability of challengers to go for another price war. In this backdrop, we raise our mobile margins estimates by 200-300 bps over FY11-12.
We believe that Bharti (target price Rs.360) and Idea (target price Rs.75) could give us a 27-30% upside from current levels and hence upgrade them to OUTPERFORM."
The brokerage further says that Bharti may achieve an EPS (Earnings per share) of Rs.20 for the third quarter of the 2011 fiscal, with 27% earnings growth for the next 2 years. The reasoning behind re-rating for Reliance Communications and Idea Cellular is supported by improvement in the EPS by 7% and 100%, respectively.
The sector has been under a constant buzz after the re-entry of Reliance Industries into the Telecom sector post acquisition of Infotel Broadband Services – which owns pan-India licenses of broadband airwaves. Reliance Industries has indicated that it would use the unproven long-term evolution technology for wireless broadband services rather than the WiMax standard.
Telecom analysts are of the opinion that the sector is up for positive surprises once the premium 3G services are launched. Most of the bigger players have placed big bets on the elite 3G services at a time when the earnings from the call services are accruing wafer-thin margins.
Right now, the valuations in the telecom sector are cheapest in the nearest recorded history as it has priced in almost all the negative impact, including the flash distortion that is likely to emerge by a sudden entry of Reliance Industries in the telecom industry.
In fact, many retail investors have already started buying into telecom stocks based on the sum-of-the-parts valuations of the telecom towers owned by the telecom companies. More recently, even LIC had bought a 5% stake in Bharti Airtel – a hint that the sector prospects can only improve from here and that the sector is game for consolidation very soon.
What do you feel about this re-rating scenario for the telecom sector? Could it be for real?