are those who frown at the mention of 'telecom' as an investment
sector. Bear with them. It's only a minor exaggeration that the
sector resembles a pinball machine. And that too, with the flaps,
louvers, springs and flash-signs shifting around even with the ball
in motion -to match the, er, shall we say 'dynamism' of the policy
Clearly, it's not a sector for the weak-hearted.
Investors who're interested in potential returns, however, are advised
to read on. There may be no easy way to negotiate the risks imposed
by the regulatory maze, a legacy of the industry's haphazard evolution,
but that should not deter you from scanning the BT 500 for the stocks
with an audible ring of success about them. Telecom may be a noisy
sector, but it's signing up customers like there's no tomorrow.
Stage Is Set
"Reforms in the telecom sector not only
started late in this country," says Chetan Shah, Head of Research,
Quantum Securities, "the sector has also time and again grappled
with some regulatory problem or the other." The latest flash-signs
indicate a Unified Licensing policy in the making, as proposed by
the Telecom Regulatory of India (TRAI). This is an initiative that
will players are welcoming with the argument that re-laying the
field as a single-policy market for all technologies (in competition
to meet common communication needs), is the most pragmatic way forward,
old legacies be damned. It is an initiative that the GSM cellular
operators are bemoaning on the grounds that it amounts to sanctifying
the will players' wireless operations that have barged into a field
reserved by the original policy for fully paid-up GSM licencees.
The long drawn-out opera is far from over yet.
Amidst all the heat generated raised by that battle, India's teledensity
has shown breathtaking progress in recent years. India now has about
63 million phone connections, up from 23 million five years ago.
Public sector players Bharat Sanchar Nigam Limited (BSNL) and Mahanagar
Telephone Nigam Limited (MTNL) together still account for roughly
four in every five connections, but private players, having already
made major headway at the upper end of the market, look set to widen
their share rapidly in the years ahead.
Mobile telephony, already 23-million strong,
is fast outpacing the fixed line variety-thanks in part to the blistering
pace set by the rivalry between cellular and will operators. The
race, in fact, is heading for a dead-heat phase. September 2003
saw 0.9 million new cellular and 0.8 million will subscribers, compared
to 1.1 million cellular and 0.7 million will subscribers the month
before. What will October's figures look like? Analysts are waiting
for them with bated breath.
Anyhow, India could be talking about 75 million
connections by the end of the financial year-making it a truly phenomenal
year for Indian tele-connectivity. What's more, by the end of 2004-05,
India's mobile user base could overtake the fixed line base. It
is simply cheaper to network people with airwaves than physical
cable lines, and that's showing up in the market figures.
Yet, despite the scorching growth, India lags
other large markets such as China, which has 240 million fixed line
and 242 million mobile connections (47 million added on just last
Besides, volumes are not even a fair comparison.
In terms of revenue, the Chinese telecom market is placed at $35.2
billion for just the first seven months of calendar 2003. India,
in contrast, is hoping to triple its annual revenues to reach all
of $8 billion by 2012. Putting handsets in pocket after pocket is
all very good; how much money are these players going to make?
The most aggressive contenders in India, alphabetically
listed, are Bharti, BSNL, Hutchison, Reliance Infocomm and Tata
Teleservices. Also in the reckoning are non-mass players such as
Idea and a clutch of regional players. But which are the stocks
that make worthwhile investments?
As it turns out, Bharti Tele-Ventures is the
only significant telecom player that is publicly listed for trading.
Others are unlisted, with the exception of Tata Tele Services, which
too, only has its Maharashtra entity listed.
Bharti, which markets Airtel and TouchTel,
already commands a market cap of Rs 8,440 crore (average of April-September
2003), up from Rs 6,219 crore the previous year. The company has
not only attracted direct investment of $400 million from Warburg
Pincus, Singapore Telecom and others, it is an FII favourite (they
hold more than 5 per cent of its equity). With a cellular subscriber
base of 5.1 million, it is the top player in this segment, and has
the largest geographical coverage as well.
Moreover, it has momentum on its side. Says
Subhabrata Majumder, Telecom Analyst, Motilal Oswal Securities,
"Bharti has the first mover advantage. Given the company's
growth numbers and increasing subscriber base, it's a great buy
even after the recent upmove in price. We believe that Bharti would
continue to be amongst the top two telecom companies in the bigger
telecom story to be unveiled over the next five years." The
company has survived the recent Reliance Infocomm onslaught, and
still poses the biggest obstacle to its plan of complete market
domination. Will Bharti make money? The company is beginning to
make its way towards the black.
Reliance Infocomm can be invested in by proxy,
since Reliance Industries holds a 45 per cent stake in the telecom
project. The company may be under fire for muscling into the field,
but it has already logged over 4.5 million will subscribers, and
seems unlikely to reverse course (even if it's made to cough up
some retrospective cash to make up for its market entry). "All
said and done," says Quantum's Shah, "Reliance Info is
one of the lowest cost set up since most equipment has been procured
in distress sales. This company would provide tough competition
to others once its teething problems are through. Besides, will's
CDMA is a much superior technology compared to cellular's GSM."
What about Tata Teleservices? It has only 1.1
million subscribers for its will service, but could become a big
player in years to come. A drag on the group's telecom plans has
been the acquisition of Videsh Sanchar Nigam Ltd (VSNL), bought
by it from the Indian government in early 2002. Barely had the controversy
over VSNL's investment in Tata Teleservices died down that the telecom
monolith was hit by a loss of its international call monopoly. VSNL's
profit-before-tax, down from Rs 2,075 crore in 2001-02 to Rs 1,268
crore in 2002-03, is likely to slip further this year.
That then, is the lowdown on this sector, which
is always in the news for all the wrong reasons. If you see the
pinball elements as 'part of the turf', go ahead, place your bets.
There's money where others fear to tread.
Presenting the BT-Mutualfundsindia.com scorecard
for the second quarter's mutual fund performance. The message? Think
who thought technology stocks were yesteryear's story have had to
eat their words. Tech is back, despite the fact that indicators
of a sustainable recovery in the US economy are still awaited. The
banking sector, meanwhile, continued its winning streak through
the second quarter, with major stocks scaling new highs.
The Basel Committee on prudential banking has
given Indian banks a shot in the arm by hinting that India could
use a 50 per cent sovereign risk weight rather than the current
100 per cent, thus reducing the capital adequacy burden.
The BSE Bankex Index moved up 4.55 per cent
on a single day (September 26) in response to this news. The sector's
buoyancy helped UCO Bank and Indian Overseas Bank raise stupendous
amounts of IPO money from the market last month.
With good monsoons and the upward revision
of the year's GDP projection, bulls took near-total command of the
market. The rally has been broad-based, with the BSE Teck (TMT stocks),
BSE PSU, BSE Healthcare, all up by 38.24 per cent, 27.79 per cent,
and 26.13 per cent respectively, over the quarter.
It was celebration time for all equity fund
investors this past quarter, particularly it sector funds. Diversified
equity funds were not far behind. The pharma funds joined the action
towards the quarter's end.
In the Balanced Funds category, the average
absolute return for the quarter was around 17 per cent. The top-scorer
SBI Magnum Balanced has gained from its exposure to information
technology stocks. Among debt funds, the more aggressive funds have
ended up winners. PNB debt fund, with its average exposure of more
than 85 per cent to Gilts, has topped the table. The trend in Gilt
Funds is no different from Income funds, and the category's average
returns have been in the range of 3-5 per cent.
The performance of Liquid funds matched expectations,
by and large. The yields on short tenor paper hardened a bit in
the later part of the quarter. On an average, such funds have given
4-5.5 per cent annualised returns over the past three months.
Going by risk-adjusted returns, among Equity
Funds, Tata Equity opportunities fund is the best performer. HDFC
Prudence Fund turns in a good risk adjusted performance too.
Among income funds, UTI Bond fund, which is
No. 19 on absolute returns, has emerged as the best risk-adjusted
performer. In the Gilt category, Escorts Gilt fund has secured the
first place. Among Liquid Funds, the success of low-profile fund
houses is a surprise. Canliquid, bob Liquid, First India Liquid,
LIC MF Liquid and ING treasury portfolio have done well, though
on relatively high risk.
The technology and pharma sectors look set
for action in the current quarter, largely because of their late
participation in the year's rally. Other than that, fund managers
might have to struggle to sustain their performance levels.