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Dip in Scrip - Operator stocks suffer major value erosion

March 15, 2010
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After almost a year's slump, the Indian stock markets have witnessed a spectacular growth with the Sensex crossing the 17,000 mark in March 2010 compared to its sub-9,000 level in March 2009.Ironically, the telecom sector, which had surprised the market by showing strong resilience during the global financial crisis in 2008-09, has failed to match the current market growth in terms of stock prices and market capitalisation. Operator stocks have undergone a major value erosion on the bourses post the tariff war that started in September 2009. Bharti Airtel was the second worst performing stock on the benchmark index in 2009, down 8 per cent in a market that was up 81 per cent. The market capitalisation of Reliance Communications (RCOM), the second largest wireless operator by subscriber numbers, has nearly halved over the quarter ended December 2009, while that of Idea Cellular has fallen by over 25 per cent. Mahanagar Telephone Nigam Limited (MTNL) and Tata Teleservices (Maharashtra) Limited (TTML) have followed a similar trajectory.

And this is despite the fact that the mobile sector has been witnessing exponential growth in terms of subscriber numbers.Several reasons can be attributed to this downward movement in operators' scrips.In the past few quarters, the per-user statistics of the sector have suffered on account of factors such as increasing rural penetration leading to lower growth in network minutes and falling tariffs with the entry of new players. Moreover, regulatory uncertainty has increased over the past year.While 3G auctions have been delayed more than four times on account of various irregularities, policies on mergers and acquisitions, entry of foreign players, mobile number portability, mobile virtual network operators, etc. have also not been up to the mark. All of these have resulted in low investor confidence in the sector of late.

Surprisingly, telecom firms other than operator firms seem to be on a completely different growth path as far as their performance on the bourses is concerned.Sterlite Technologies, GTL Infrastructure and Finolex Cables are all mid-cap and small-cap companies that have generated impressive returns over the past year.

tele.net takes a look at the stock performance of some telecom companies between February 2009 and March 2010...Bharti Airtel: India's largest telecom operator, Bharti Airtel went in for a stock split in July 2009. Since end-July 2009, its scrip has dipped from Rs 410.55 to Rs 292.20 as on March 8, 2010. The stock had been performing well until October 2009, when the company announced its financial results for the quarter ended September 2009. The results did not match Bharti's strong growth in the past few years and led to the stock taking a hit. Ever since, the growing uncertainty in the sector has pulled down the telecom major's scrip. Also, Bharti's recent announcement of its bid to acquire the African assets of the Kuwait-based Zain Group does not seem to have gone down well with the investors. On the day of the announcement, Bharti's stock closed at Rs 285.40, down Rs 29, or 9.22 per cent. This, industry analysts believe, is because the price quoted by Bharti for the acquisition is too high and will increase the company's debt burden.

Idea Cellular: Ever since the company achieved a pan-Indian presence, its stock has been growing. Though the JulySeptember 2009 quarter results were a dampener, following which the stock fell from Rs 75.35 in end-September 2009 to Rs 52.05 by end-October 2009, the stock has been growing ever since. It is currentlytrading at around Rs 62.

RCOM: The company's stock, which reached a high of Rs 310 in September 2009, fell to Rs 175 in October 2009 following the announcement of its quarterly results. It was trading at Rs 165 on March 8, 2010.

Tata Communications: The enterprise and long distance service provider has been reporting unimpressive results for the past few quarters. Its stock was trading at the Rs 400 level in February 2009, the Rs 500 level during July-August 2009 and the sub-Rs 400 level in October 2009. It closed at Rs 295.40 on March 8, 2010.

MTNL and TTML: These two regional operators have also been facing the heat of falling investor confidence in the sector.While MTNL's scrip has increased from Rs 64.25 during end-February 2009 to Rs 74.95 on March 8, 2010, TTML's stock has witnessed negligible returns as its price increased from Rs 23.55 to Rs 24.50 during the same period.

Sterlite Technologies: Sterlite Technologies, which provides transmission solutions for telecom and power sectors, hit an all-time high with its scrip touching Rs 456 on March 5, 2010. The mid-cap stock registered an eightfold growth between February 2009 and March 2010, outperforming the market. This is in sharp contrast to Rs 50 at which its stock was trading in February 2009. Several factors account for this exponential growth. The company's net profit surged 134.4 per cent to Rs 737.2 million on a 35.1 per cent increase in net sales to Rs 8.67 billion in the quarter ended December 2009 over the quarter ended December 2008.

GTL Infrastructure: The telecom tower industry has been doing well in terms of growth. Unlike the operators, this segment of the industry has not been impacted by user-level tariffs, although it has become very competitive in terms of the number of players. This has resulted in several major acquisitions taking place in the sector. One such acquisition –­ of Aircel's tower business by GTL Infrastructure –­ was a key factor in driving its scrip to over Rs 40 in January 2010. Its stock price has increased from Rs 28.60 in end-February 2009 to Rs 41.55 on March 8, 2010.

Finolex Cables: The India-based telecom cable manufacturing firm generated 187 per cent returns on its scrip. It was trading at Rs 52 on March 8, 2010 compared to Rs 18.35 in February 2009.

To conclude, several industry analysts are of the view that telecom is probably among the few sectors where the stocks are currently available at valuations that are cheaper than what they were in early 2009. Going forward, as the ongoing tariff wars settle down and there is greater regulatory certainty, investors will again benefit from a growth in earnings.

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