India Infoline on RIL's telecom foray, top sector pick

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Reliance BSE | NSE 09/02/12 Are Mutual Funds betting on Reliance?

Reliance Industries made its big bang debut into the telecom space by acquiring telecom firm Infotel Broadband.  The move by the energy giant would mean more competition for Indian telecoms firms, for whom voice has been the primary source of revenue so far, but are now also expanding into wireless data.

In an interview with CNBC-TV18, Bhavesh Gandhi, Telecom Analyst, India Infoline, spoke about his reading of RIL big bet and his outlook for the telecom sector.

Below is a verbatim transcript of the interview. Also watch the video.

Q: Today, if you look at the pressure on Bharti and Idea, in fact even closing hours on Friday, after the news is out that there is one huge competitor who is now elbowing his way into this space. Would you have buy on these stocks or would you really wait and see whether there is more bleeding to happen?

A: First of all, what Reliance has done is acquired a spectrum or a license for a particular period. Now it needs to get the subscribers for the spectrum that it has because the way it rolls out or uses its spectrum whether it's WiMAX or whether it is LTE (Long Term Evolution), which is a sort of continuation of 3G, it will decide what will the capex be. So the existing player maybe Bharti sort of readily well cushioned in terms of its subscribers and the balance sheet. Others will have to sort of pick their strategy, especially in broadband where Reliance has a huge presence now.

Q: Do you see next move from Reliance maybe an inorganic one because they started with a presence in broadband-if they were to enter into this voice business-you think acquisition would be the right strategy or you think they can start a fresh?

A: They can start afresh. We have seen new operators how they have faired-they have sort of got only the lowest bottom quartile of the subscribers-those free float population. Otherwise I think starting a fresh in 2G right now is probably the time has gone. Existing operators, yes I think that is one of the options.

The other option is sort of go only for broadband and don't venture into voice and sort of build your business in broadband using LTE or WiMAX-whichever is sort of the technology available ahead and then maybe a sort of a niche presence and not full-fledged wireless operator, which everybody else is.

Q: Doesn't normally associate Reliance with very niche playing. But in any case how would you approach this as a stock picker? Which are the stocks on which do you have a buy, will you smell some consolidation related buy's in the smaller space as well?

A: Bharti would be the top pick right now in the sector for us. But it won't probably take part in any sector consultation because those TRAI norms may sort of kick in for particular subscriber limit and spectrum limit.

Smaller operators could see some could be in the play but that is probably a long-term story. One should stick with Bharti right now.

Q: So has Bharti bottomed out or you think it is quite a bit of up side potential which is there in this stock?

A: If one assumes and we believe that tariffs are sort of, the tariff war which you had seen in last, in second half of 2009 have sort of gone and new operators which were the chief initiators of that, if they sort of focus more on revenues and less on subscribers then Bharti would probably, say in terms of revenue per minute target, that should bottom out at about 40 paisa per minute, which is still much above its cost structure. Yes net, Bharti should look to better days ahead.