Telecom stocks are back in the game. Shares of Vodafone Idea Ltd have zoomed by a massive 142%, while those of Bharti Airtel Ltd have climbed over 21% since the two companies released their September quarter results on November 14.
Though the two firms reported a mammoth cumulative loss for the second quarter due to the provisions set aside after the Supreme Court’s adverse verdict in the AGR (adjusted gross revenue) case, the market appears to be riding the hope that the government may soon announce some sort of relief for the beleaguered sector.
Meanwhile, Bharti Airtel and Vodafone Idea have decided to increase prices with effect from December 1, 2019 to maintain viability of the business after huge Q2 losses. In such a scenario, is it the right time to invest in telecom stocks? Here’s what brokerage houses are saying:
Kotak Institutional Equities raised its doubt on the price hike move by telecom companies: “Will this be another false positive on pricing like the two rounds of price increases taken by Jio in H2CY17 turned out to be?” asked the brokerage firm.
In a recent report, Kotak Institutional Equities had said the industry will consolidate further if the government does not offer a substantial relief on AGR liabilities, regulatory levies and potentially a floor on pricing.
G Chokkalingam, founder, Equinomics Research and Advisory, said: “Telecom is an oligopolistic industry with only three players, holding almost the entire market. Going by economic analogy, an oligopolistic industry does not suffer massive price erosion. I believe the situation will improve, but the kind of pain these firms are facing, whether they would rise proportionately to meet the burden is doubtful.”
Sameer Kalra, founder of Target Investing, said he did not see any reason to look towards the telecom sector. “A major chunk of any kind of funding or price hike will go to either debt payment or legal obligations. So, it does not come to the bottom line,” he added.
ICICI direct, a leading brokerage firm, said the waiver on AGR-related payment will hold the key. “Amid the looming liability of Rs 34,260 crore and Rs 44,150 crore for Airtel and Vodafone, respectively, we believe that waiver on AGR-related payment (at least interest, penalty, etc, which forms 75% of dues) will hold the key. Nonetheless, VIL (Vodafone Idea) notwithstanding payment waiver would also need some capital infusion to stay afloat,” ICICI direct said.
Global brokerage firm Jefferies upgraded Bharti Airtel to ‘hold’ from ‘underperform’ after the Q2 results and raised the target to Rs 407 from Rs 280 per share, but maintained its ‘hold’ rating for Vodafone Idea and slashed target price to Rs 2.40 from Rs 8 as it believed that the company would still lose a majority of high ARPU (average revenue per user) subscribers to Bharti Airtel.
Morgan Stanley, while having an equalweight rating on the Bharti Airtel stock, raised target price to Rs 410 from Rs 360 as it thinks the company is well positioned in the sector both from a leverage and strategy perspective.
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