Speed Dialing Down Stocks

Telecom stocks have lately been squeezed horrifically. In just a day since the big launch from Reliance Jio, the three telecom stocks have seen Rs 17,508 crore of investor wealth evaporate.

The Idea stock dipped 10.8 per cent, while Bharti and Reliance Communications lost 9.4 and 8.9 per cent. But a next-day recovery whittled down overall shareholder loss to Rs 10,368 crore. That’s still a humungous sum. The Bharti Airtel stock recovered the most, and saw net shareholder wealth shrink by just 4.4 per cent.

Nearly all of the blame for this jaded performance can be attributed to the loss of revenue the incumbents are faced with. The free voice-calling being offered from Reliance Jio is set to hugely dent profitability of telecom operators. Observers say free voice-calling is the game-changer that would draw more subscribers to Jio, which would have a huge impact on subscriber additions.

Voice revenue comprises nearly 70 per cent of the revenues of telecoms companies in India (data cover the rest), according to analysts, — and this threatens much of telecoms profitability.

Says Deven Choksey, managing director, KR Choksey Securities: “The existing players have been thriving on the voice model for the last 22 years. Now, voice will have to be made completely free as it is across the world. The existing players will find it a huge challenge to generate revenue from only data consumption.”

Observers also say that telecom operators would find it difficult to match the free-voice packages that Reliance Jio is offering. Says Naval Seth, research analyst, Emkay Global: “Free voice-calling is a bigger negative, and let’s not forget that the Rs 10 recharge is one of the popular recharges with the masses.”

Observers also expect closer to a full-fledged commercial launch by Jio different packages at various price points from the incumbents. Telecom operators are expected to try various strategies in a bid to keep their market shares unscathed, point out observers, but some of the migration to Jio would be felt immediately.

At the higher end of the billing spectrum, data-heavy consumers are seeing a bonanza in the new packages. Reliance Jio is offering more bandwidth that could save consumers nearly 40 per cent in bandwidth costs. Voice calls in some of the higher-end packages are being offered free by the incumbents but that would hardly be comforting in the wake of significantly cheaper and faster tower-to-fibre networks.

It’s not just the voice or data part of the narrative that is causing much angst among investors. Over the last three years, telecom companies have not been able to deliver shareholder wealth or meaningful gains to investors. The costs of building telecom infrastructure are prohibitive, with spectrum charges comprising a large chunk of the costs. In the spectrum auctions last year, telecom operators shelled out Rs 56,034.35 crore toward spectrum.

Now, to take on newcomer Reliance Jio, they would have to bid for even more spectrum to add bandwidth to their offerings to try and match the data delivery capabilities of Reliance Jio.

Says Choksey: “Reliance Jio’s network is built on tower-to-fibre technology, which basically ensures that data packets do not get lost. Current airwaves of incumbents are largely 3G, and partly 4G and 2G. Now they will have to spend money to acquire greater spectrum, and build cable infrastructure that helps carry data. This will call for a tremendous amount of capital expenditures.”

Even with the recent price correction in telecoms stocks, their prices are not yet providing a level of comfort to investors. The competitive intensity that is expected to continue in the next few quarters would keep pinching these stocks.

In the short run, the early knee-jerk reactions in stock prices are done. Of late, stock prices have been showing signs of stabilising. Seth reckons that stock prices will be range-bound for some time now till further clarity emerges on new telecom packages.

Initial subscriber additions to the Jio offering are being closely watched for cues regarding market share movements. If the figures are huge, and if Jio is able to corner a big chunk of the market, which is about 10 per cent, analysts are not ruling out a slow de-rating in stock prices. If that happens, the sector is expected to further fall out of favour with investors.

Choksey, however, does not expect the sector to recover over the next three years, as that’s the amount of time, telecom companies will need to strengthen their networks, and offer competitive services such as mobile TV and so on.

Observers are also watching the incumbents’ ability to up their range of offerings and services in coming months and, at the same time, will be watching the debt and cost levels. If there’s even a marginal success on that front, telecoms stocks may have a chance at staging a small recovery. But, till then, investors could be found dialing themselves quite out of the sector.