Sanjeev Prasad, Head of Research, Kotak Research says that the telecom volume growth will continue and the pricing will be competitive.

He adds that Bharti, which has a price target of Rs 600, may post higher wireless subscriber additions than Rcomm, which is at Rs 400.

Excerpts from CNBC-TV18's exclusive interview with Sanjeev Prasad:

Q: Just take us through your impression of the big results that came out. The numbers are excellent but are they sustainable?

A: I would look at the operating numbers more carefully than the bottomline numbers.

At the operating level, both Reliance and Bharti, to some extent, reported numbers below our expectation but the net income was helped by several factors including very high other income and flat depreciation for both companies compared to what was expected.

That actually resulted in positive surprise at the net income level, but at the EBITDA level, things were not as great as what was thought.

Q: How do you read the capacity that BSNL has been able to add, it seems to be adding capacity better than what most people expected. Do you see that affecting Bharti’s ability to keep on adding to increase the subscriber base as they have been in the past?

A: Keeping in mind the fact that BSNL typically has the big blips in certain months and March being the year-end month obviously will have a big number in terms of reported number.

Going forward, BSNL will eventually bring on its 63.5 million line capacity and this court case with Motorola has been resolved, so they will award the contract to Ericsson Nokia and ITI. That could actually do a lot more competition in what we are seeing currently in the market.

Remember Bharti is expanding very aggressively. Reliance is becoming more aggressive looking at the low cost hand set which they have introduced on CDMA side, whenever they get the GSM spectrum, they will be more aggressive over there.

Then there is Idea expanding into new circles and at some point Vodafone will also probably become more aggressive in case they want to increase their market share. That is one of their stated objectives behind their acquisition. So, this market will become a lot more complicated than what we have seen so far in terms of pricing. Volume growth will continue.

Q: What did you make of Reliance Communication’s numbers and do you think a case can be made for closing in that discount gap between Rel Comm and Bharti now?

A: If you look at the revenue growth of the two companies, Bharti is well ahead of Reliance Communications, as of now. If you look at the absolute numbers, from a quarterly basis, then this quarter Reliance’s revenues grew by about 2.2 billion on a fourth quarter versus third quarter basis whereas Bharti is delivering about 4.9 billion fourth quarter versus third quarter.

Clearly, there is a big gap opening between the two and we are seeing this trend over the last three quarters and one reason could be just the quality of supply, which Bharti has versus Reliance. PCO revenues are quite substantial in case of Reliance Communication and I am sure there will be a slowdown or at least lower growth compared to the normal number of subscribers.

Going forward, in terms of wireless addition, I would think Bharti would deliver bigger numbers compared to Reliance Com, in terms of sheer wireless subscribers additions.

Q: How much more pressure might both Bharti and Rel Comm see both in terms of ARPUs and revenues per minute and can volume growth be sustained at the pace it is running at?

A: I don’t see any issue to the volume growth. If you see the numbers we are looking at, 311 million subscribers by March '09, we are looking at effectively doubling of the market over the quarter by 23 months, so I am quite okay with that. The issue was on the pricing and there is enough scope for pricing to go down further in this country.

People may claim that the price points are the lowest in the world. The fact of the matter is the return on investment is among the highest in the world. If you look at the return on investment, for the fourth quarter, for all the three companies, Bharti had a cash return on cash investment of 27%, Reliance was about 24% and even Idea was about 23% odd.

I am not too sure how long this can be sustainable in a market which is going to become more competitive. So, clearly there is enough scope for pricing to come down in this country given the fact that the return on investment is very high at this point of time.

Q: Lowest prices yet highest returns on investments how is that being achieved?

A: I guess it is a function of capex, etc, probably they are not investing at levels, which they should. I am not too happy with the quality of service which is available in Bombay at least.

Q: Do you think the entry of Vodafone and others will force capex to go up and is that going to be another blow to ROI?

A: That is what my sense would be and clearly that is one plank which something like Vodafone could adopt in terms of offering a better quality of service in terms of just the voice clarity, dropped calls, etc. This is also a function of what is happening on the spectrum front.

To be fair to the operators there is an issue with respect to spectrum in many of the markets, so once the government related additional spectrum you could probably see some of these quality issues getting resolved. Maybe, they could get away by doing with lower capex if they have more spectrum but at this point of time you don’t have the spectrum or the right amount of spectrum.

Q: What kind of price targets at Kotak do you have for Bharti, Rel Comm and even for Idea?

A: We have rather low price targets for all of them. For Bharti, we have Rs 600 but that is based on pretty aggressive set of numbers. I am not too sure what others are really building in their models, in fact, if you look at our numbers for Bharti, I am looking at something like 47% return on capital employed for the company in my terminal year which is 2017. 

Presently others are happy giving higher return on capital employed. I am not too sure which business in the world can deliver that kind of returns longer term anyway but for Reliance we have Rs 400, for Idea it is Rs 100.

Q: On the smaller stocks like Tata Tele Services Maharashtra, do you think the business there is showing a turnaround as well?

A: I honestly don’t look at it so I can't comment on it too much.