NOVEMBER 9, 2003
 Cover Story
 BT 500
 Personal Finance
 The Other 500
 Back of the Book

Gates Against Malaria
Bill Gates, who claims
to watch the efficiency
of each dollar he spends, has put down $168 million to
combat malaria.

Age Discrimination
The UAE wants to kick
all expats above 60 out
of their jobs. A fine
start to the IMF/ World Bank meet in Dubai, eh?

More Net Specials
Business Today,  October 26, 2003
The Ring Of Pinball Money
Telecom stocks on the BT 500 have been volatile. But there's good value to be had in some of them. Here's why.

There 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 framework.

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 month).

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?

The Ring

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.

Another Wave
Presenting the scorecard for the second quarter's mutual fund performance. The message? Think sectors.

Those 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.

Amazing Quarter

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.

Risk Adjustment

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.

Future Gazing

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.