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Don't go technical on telecom

Source : BUSINESS_STANDARD
Last Updated: Sun, Jan 20, 2013 19:42 hrs

Several telecom policy issues will be resolved one way or another in the next couple of months. As of now, that's all the market knows about the sector. The resolution could be relatively good or bad for specific companies.

It guarantees a shakeout of severe dimensions. The service providers left functional at the end of this chaos will face less competition, which means that they may be able to raise tariffs. India is also a market which still has plenty of growth opportunities.

More sophisticated consumers will move to heavier mobile data usage, raising average revenue per user (ARPU). Already, mobile internet traffic exceeds fixed line internet traffic in India and if 3G coverage was less spotty, usage would pick up faster. Plus, there's under-penetration in rural and semi-urban geographies so subscriber numbers should also grow. Both growth factors are long-term, of course.

Indian telecom service providers (telcos) will, however, have higher cost inputs. First, there will be the enhanced cost of various bands of spectrum. Whatever that cost finally turns out to be, it will be much more expensive than in a prior period. There could also be service disruptions and additional capex will be required if there is re-farming.

The price of diesel is also being hiked in stages. That is another key input. Telcos must use back up power and usually employ gensets for the purpose. The telecom industry is probably the biggest diesel consumer in India. The demand for backup power in telecom is not going to ease, until the unrelated mess in the power sector is dealt with.

This may mean that rural and semi-urban networks will be loss-making, given low penetration and low ARPU. Financing for licenses and capex will either be high-cost (if rupee denominated) or taken in forex at high exchange risk. International telecom majors are also wary about India exposure after multiple fiascos so that puts a brake on potential FDI inflows.

To make a judgement call involves balancing off the prospects of long-term growth in a less competitive scenario, versus rising costs and policy uncertainty. Generating hard numbers with any accuracy is impossible even for insiders. One has to make assumption upon assumption regarding policy, and also assume long-term growth rates for traffic, ARPU and subscriber numbers.

PSUs MTNL and BSNL are both loss-makers and unlikely to turn around without a dramatic display of political will. RCom has too much debt on the balance sheet. Airtel has seen declining quarterly margins now for three years and this has led to a change in top management.

The market seems selectively optimistic, however. Idea, Rcomm and Airtel have all seen sustained uptrends in the past 30 days. Airtel is up 12 per cent even as the Nifty was up 3 per cent. Idea is up 23 per cent and RCom up 10 per cent while the Nifty Junior (to which both stocks belong) is up 2 per cent. Even Tata Communications, a specialised player, has risen 5 per cent. MTNL has stagnated meanwhile. In technical terms, the patterns generated by Airtel, Idea and RCom are all bullish. Newsflow pertaining to spectrum auctions at the end of the month could affect this. But the effect may be positive as well.

The normal way to handle this sort of trending pattern is to set a trailing stop loss and go long. If the stock moves up, raise the stop loss. Hold until such time as the stop is hit. In this case, the trader must be prepared for extraordinary volatility every time pertinent information hits the market. If you're using leveraged instruments like stock futures, single session gains or losses could be really huge, given the big (4000 share) lots of Idea and RCom.

The niggling worry is that information is not symmetrically available to all players. There are too many policy matters in flux and too many strategic management decisions on the table. Technical analysis works best when the market has symmetric information flow and knows what to discount. This is not such a situation.




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