Maintain year-end Sensex target of 19000: Ambit Capital

Q: Any thoughts on the current digitization debate? How you would approach some of these verticals either on the cable or distribution side or the core television properties?

A: We find the distribution assets more interesting than the content asset.  Amongst the distribution assets, two cable assets Hathway and DEN Networks look quite interesting. Hathway Cable is a decent company, it has had a good run and my sense is July 1 is when the country goes digital. So, between now and then, building a position in Hathway won’t be out of order.

The word of caution is that big upside in these stocks will come when the acquirer arise, whether it’s a large Indian acquirer or a foreign media company, which comes on the back of FDI being liberalised. But between the two assets, DEN and Hathway, it is certainly worth looking at them and trying to build a position because  distribution assets will become more valuable.

Amongst the content plays, the two large content plays that are Sun and Zee , we don’t cover them. As a house, we don’t feel comfortable covering those stocks. My sense is that smaller media properties, smaller broadcast properties will face some acquisition interest in the coming year or so. But, it is hard to say which one and at what valuations. So the safer story on digitisation is cable rather than the content side.

Q: You have been talking about a 19,000 target on the markets in an environment where your peers are either bringing down targets on the Sensex or talking about the potential of a derating. How much of these is courtesy an improvement in macros earnings potential? How much do you think is part of a broad global tide will lift all boats scenario? Is this more to do with the global situation or more to do with the turnaround here?

A: I think what makes me bit more optimistic than perhaps our peers and what has helped us maintain a 19,000 target through what has been a difficult few months for India, is that when we talk to investors and when we meet investors, we can clearly see that for all the negativity about India there are these things which are driving a lot of investors thinking.

The first is GAAR and I would be very surprised if we don’t get positive clarification on GAAR. There is so much at stake for the country that it will be surprising if the FM doesn’t clarify by GAAR in a positive manner. The second thing which has driven a lot of investor thinking is clearly oil.

Brent Oil at USD 125 per barrel is a huge pain point for India. Without being an oil expert, I will be surprised if Brent continues drifting North rather than drifting South. Given what is happening to growth in China, one would expect Brent to drift South. So, that will be second positive for India.

Thirdly, Long-term refinancing operations (LTRO), Quantitative Easing (QE) in the western world has been a positive for India over the last couple of years. Given what is happening in Spain, I would expect to see QE and LTRO to come back in some shape and form over the next 3-4 months. For all our negativity about the policy climate these three big triggers have immense influence on the level of Indian market. I expect at least two of this three triggers to work out in favour of the Indian market

Q: How do you approach this telecom bunch now? How much weightage are you giving quarterly performance versus what comes through on the big regulatory issues for a company like Bharti ?

A: There are two things, which will drive this stock in the next couple of quarters is partly how the regulatory issues pan out. Our sense is Bhart is quite well placed to deal with both the 122 licenses re-auctioning and with the broader corpus of regulatory issues.

The second key driver of these stocks will be how they deal with consolidation in the sector. It is now down to Vodafone, RComm , Bharti and Idea to slug it amongst themselves. My sense is that between these four players Vodafone and Bharti will benefit from hiking their prices and benefiting from reduced intensity of competition.

Therefore amongst the listed players, Bharti is by far the best positioned both in terms of benefiting from the reduction in intensity of competition and in terms of benefiting from the regulatory changes. The results looked alright to me; I don’t think there were any great negative surprises there. But the stock will be driven by regulations and their ability to capitalise on reduced intensity of competition. The last three months of customer sign ups in Bharti have been very good and I expect that for 3-4 months as well.

Q: What about the other incumbents in the telecom space like Idea etc if we don’t get a negative news as far as this TRAI goes, do you think something like Idea would benefit as well?

A: Idea has been the stock to watch in this space over the last 12 months. There are couple of things about Idea, which make us more negative about Idea vis-à-vis Bharti. The first is quality of the customer; Bharti has much better quality of customers. Idea’s customers have been generated by extensive price cutting over the last couple years.

When you have price sensitive customers, you are not going to be able to capitalise in an environment where intensity of competition reduces. Bharti on the other hand with higher quality customers, they are less price sensitive and it gives Bharti much greater headroom to raise prices and therefore raise profit margins, but Idea doesn’t have that luxury.

Second thing is operationally, given Idea’s levels of debt-equity given the fact that they too had some impact from 122 license calculations we see them much more fragile from a regulatory perspective. We see less headroom to cope with regulatory set back both financially and operationally.

The combination of the two and plus the fact that the stock has had a good run over the last few months, predisposes us to Bharti more than Idea. But, these two amongst the listed players would be better of the lot and amongst over players that is listed and unlisted, Vodafone and Bharti are sitting quite pretty at the moment.