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The telecom sector appears to be joining the FMCG and pharma sectors as a favoured defensive equity investment, and more so after the recent tariff hike by operators.
“Air time cannibalisation is subsiding and players are not likely to increase tariffs in a hurry as a 20 per cent increase has already happened,” said a telecom analyst at an Indian brokerage.
“Competition in this sector will not increase in the next one year and new operators have been systematically reducing free air time being doled out.”
Industry sources confirmed that telecom firms have reached a tacit understanding that undercutting was unsustainable as it had an adverse impact on operator profitability.
Companies are also cutting commissions to their channel members for new customer acquisitions, and also commissions on recharge of prepaid cards, to enhance profitability.
The impact of tariff hikes would be reflected only from the third quarter as the second is usually dull due to the seasonality factor, say industry watchers.
Telecom firms were measured in their rollout of 3G services and this has had a positive effect on companies such as Bharti and Idea.
This, experts said, ensured that their margins were protected, as increase in operating expenditure incurred on 3G would have more than neutralised the tariff hike.
Immune to rate hikes
Telecom operators are also immune to hardening of interest rates in India as most of them have borrowed overseas.
With government fixing the uniform licence fee at 8.5 per cent of adjusted gross revenue of the operator for the spectrum every operator has, older telecom firms such as Bharti, Idea and Vodafone will take a hit on their balance sheets said experts.
Overall, the average revenue per minute for the telecom sector would remain stable at 42- 43 paise for the next year, most of the experts say.
The valuations of Bharti and Idea are in line with that of their global peers MTN and Axiata and are trading at an EV/EBITDA multiple range of 6-7x, said experts.
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