Market Watch | Telecom story running out of steam - Hindustan Times
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Market Watch | Telecom story running out of steam

None | ByUdayan Mukherjee
Nov 02, 2007 10:52 PM IST

A phrase typically used to explain the woes of political parties that get voted out of power seems curiously apt in describing the predicament that cellular (GSM) operators find themselves in today, writes Udayan Mukherjee.

A phrase typically used to explain the woes of political parties that get voted out of power seems curiously apt in describing the predicament that cellular (GSM) operators find themselves in today. The new norms for spectrum allocation are unambiguously negative for the large existing or incumbent GSM players. It favours new entrants and prepares the field for a more competitive environment.

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For players like Bharti and Idea, it cuts many ways. One, availability of spectrum —the lifeblood of the industry, becomes difficult. Current operations and expansions get constrained. The price of spectrum goes up, hence profitability gets hurt, maybe significantly. More players get in, attracted by liberal spectrum norms, and make the market more competitive. As it is, the average revenue per user is on the decline and this could accelerate that. Headwinds are building up for what has been one of the best sectors in the Indian stock market.

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The business is still robust. Customer additions are happening at a robust pace, the penetration story is far from over. The question, though, is whether the upward re-rating story is coming to an end. Stocks like Bharti have been pillars of this bull market. Is Bharti reaching the peak of its curve from which it starts a gentle de-rating dip? For a stock that has lost 20 per cent of its market cap in a fortnight, the question begs asking.

Like infotech, has telecom too left its best days behind? The infotech sector's rich valuations acted against it when the rupee started appreciating and today the valuations of cellular stocks face the same problem. They were expensive and at the first sign of trouble, began a process of de-rating. Not the entire sector though, Reliance Communications has been an outperformer and is just trailing Bharti in market cap. That said, the relative game has played out. Now it is a sector call. If indeed the turf is changing, then the question is whether telecom stocks can continue to outperform the market. It is never easy to write off a theme as powerful as telecom, yet the first signs of uncertainty are visible.

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