Presentation on theme: "Telecom Sector Long Term View. In this presentation: We will focus on telecom sector as a whole. The technology is converging on nothing but communications."— Presentation transcript:
In this presentation: We will focus on telecom sector as a whole. The technology is converging on nothing but communications and networking. Be it the way we speak or our gadgets speak with each other, its all about: Expressing Yourself. Since telecom sector does not have a vastly followed index, we will focus on the biggie of the sector- Bharti. Any comments are purely for educational purpose only. There is no intention to harm the image of any company or any government authority whatsoever. Bluetooth, Wifi, Bluetooth 2.0, DSL, DTH, GPS, GPRS, HSDPA, 3G, Broadband, VHF, WiMax, EDGE, Facebook, Orkut, Email etc are nothing but modes of Communication. We need not explain what we mean to say.
Telecom Sector as a whole in general You must have heard about India Story. What is it based upon? What makes India great? What is all about it? It is nothing but all about its people. The growing educated class. The high % of youth and working adults. The high quality of education and opportunities. Whatever they consume, is part of the India Story. Like FMCG and 2-wheeler auto, Telecom is also consumed in a mass way. It is a sector which is not expected to slow down anytime soon, and it is a sector which can bring about changes in the technology and way the people live. Today we can feel the effect of technology on our daily life. We feel more advanced. Villages are getting internet, Cities are getting WiFi. Its clearly the communication factor, after all.
Did you notice? There was a time when the call rates were 10 rs per minute and today the call rate is 0.5 rs per minute, But the amount of bill is same! Noticed? Why? Because with the growing traffic, growing fuel prices people have started talking a lot. Then people used to talk 1 hour a day, now people keep the phone down 1 hour a day.
The Fundamentals: Austerity is now a fashion. The government is unable to control the costs of essential items like fuel, daal, rice, wheat, vegetables, fruits etc. So effectively, govt has been trying to control things like telephone cost, sms cost, dth cost, etc to balance the monthly expenditure of middle class. TRAI seems to be expecting that telephone companies end up becoming no profit no loss companies, and they do a lot of social work by giving out nearly free phone calls. Therefore we state that per our view, Telecom sector has been the sacrificed animal to support the price rise else where. The per second calling system has been a major shock for the telecom companies. But it must be understood that the system has already been adapted by some major players across India and by competition it had to come sooner or later. The problem is two fold. The first major issue is the govt pressure on telecom. The second issue is the highly bearish graph of telephone call rates. From 16 rs per minute to
The Fundamentals: 0.5 Rs per minute, telephone calls have gone 97% down. In other words, they used to be 32 times (3200%) costlier earlier! The margins have therefore squeezed a lot. Initially there was a processing fee on recharge, which is 0, and even negative now. Same goes with the validity. Now pay 50 Rs, take connection for lifetime! The question is: Are we close to a bottom?
The Fundamentals: Assuming that we wont be paid for talking (what an idea sirji), we think that we are pretty close to the bottom. Also there is another fact that nothing stays stationary, so there can be 2 ways ahead: The cost of communication takes a U turn The way the cost applies gets changed. The first assumption is something that we cannot speculate upon. The second case looks fairly possible, especially when we look at the systems in the west. The present systems of recharge with 123 rs voucher and get 100 mins free etc etc will not sustain forever. We therefore see how west works. The US has a system of high rental with unlimited calling across US, and the system is highly simplified there. Lets see if that is the future in India.
The Fundamentals: Right now, if you look at the bill of your phone, you will notice that its clearly not the call cost that are making the bill fat. Its the VAS, Roaming and Rental charges that make it heavy. Calling cost is neither a source of revenue neither a source of profit for the telephone companies. Even if it is a source of profit, the profits are declining rather too sharply. So, we expect that we follow the west. And with that, we will have a new concept of minutes rather than call rates. We will have a monthly fee and will get some minutes or unlimited minutes, depending on the plan. 1 sec pulse duration is not a big issue. The companies can launch some plans in which they give an option of the same but at a higher rate. That will solve TRAIs clause as well as that will not affect the companys profitability either.
The Fundamentals: The bigger issues are else. India has the cheapest mobile phone service, highest usage in terms of minutes, but LEAST AVAILABLE SERVICES. Its shame that a country which is going to host commonwealth games, does not even have a 3G service! Forget WiMax, HSDPA etc. There are 1000 services which are possible on the mobile phone, but are stuck in the pipeline. The govt issues. Assuming some day they get launched, expect a good margin increment as these services will not have price war in the starting phase. The good part: Even in the era of stupendously high commodity prices and near 0 profit margins, FMCG companies stayed afloat. How and Why? Because they have extremely robust volumes. Same goes with Telecom. The volumes are pretty decent. They dont look like they are going to go down.
The Fundamentals: Summarizing: The telecom sector has been the scapegoat of govt. Both in terms of margin squeeze and in terms of delayed govt. announcements. The era of call rates seems to be coming to an end, or atleast coming to a neutral consolidation. There has been enough delay on wireless data spectrum, and hopefully the wait should end now. The new services should initially be high margin and low volume and should go vice- versa with time. Panic by 1sec pulse should be subsided with the companies launching a separate plan for the same. Volumes stay robust. Therefore the business demand stays robust. The fact that 91,92….98, 99 etc all are filled up, indicates that. Indian telecom is technologically backward. People watch TV on mobile phones in the west.
Bharti and Nifty If you notice stock markets closely, and if you remember, then in Dec2007, before the markets collapsed 33%, Bharti crashed from 1050 odd to 750 something. Nifty crashed later on but Bharti remained afloat. Then rest is history. We all know the kind of stability Bharti showed. The red colored line is Nifty. The same is brought close to Bharti for a closer inspection and comparison. Bharti crashed. Nifty saw a new high. So summarizing, we would say that we must learn from the past. Future is unpredictible but past is a solid concrete fact. Bharti then corrected for no good reason and then Nifty fell like anything, but after a month. So instead of sectorial issues, this might be possible that telecom as a sector goes into the hammer first, followed by others.
On the longer term, the stock has a decent and ONLY support at 310-300. So it can be bought with a stoploss of 290.
Summarizing…. 1)The fundamentals are not expected to turn overnight. But the panic should settle down quite quickly. The long term horizon looks fantastic in terms of margins. 2)The behaviour of Bharti in the last bull run makes us worried. The problem is that it seems the same has started happening again. 3)The very long term supports lie in the zone of 300. So one should buy on dips, with a stoploss of 290.
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