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Jul 12, 2012, 08.23 AM IST | Source: CNBC-TV18

ICICI expects good earnings in telecom; picks Bharti, Idea

Giving his view about the telecom stocks, Karan Mittal of ICICI Direct said in an interview to CNBC-TV18 that the valuations Reliance Communication is expecting for Flag Telecom looks quite decent.

Giving his view about the telecom stocks, Karan Mittal of ICICI Direct said in an interview to CNBC-TV18 that the valuations Reliance Communication is expecting for Flag Telecom looks quite decent. However, factors like investor risk appetite in Singapore and RCom's debt of about Rs 37,000 crore might not be very beneficial for the company.

Overall, Mittal is positive about good earnings from the telecom space and expects Idea and Bharti to clock good revenues. He hopes for a 4.6% QoQ revenue growth for Idea and picks Bharti as a favoured stock with a target price of Rs 420. 

Meanwhile, the one time spectrum fees may also impact some of the stocks, feels Mittal. But, it will depend on the spectrum held by the companies and the tenure of their licenses, he explained.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video

Q: What's your comment on the valuations that RCom are expecting for Flag Telecom and do you think at the price band that they have indicated the issue should sail through?

A: I think the valuations look decent, but we will have to see the risk appetite for the investors in Singapore and the other countries because a lot of other IPOs had been cancelled in Singapore in the recent past.

The other point which I would want to bring your attention to is the amount is quite paltry given the context of RCom's debt. It stands at about Rs 37,000 crore odd. The current valuation will bring in about Rs 4,000-5,000 crore for RCom and that will be very small in terms of the debt the company has.

Q: I understand that you look at OnMobile Global . Wanted to understand what you took away from all of the changes that took place yesterday and why exactly is the stock up now?

A: Fundamentally speaking, the financial performance looks decent for the company. Otherwise, whatever news is there in the market we would not want to comment on that.

Q: Let's come to the other important event that might hit all telecom companies, that one time fee that they may have to pay for existing spectrum. If that comes to be, what kind of impact are you seeing on various stocks and which might come out looking good inspite of it?

A: There is lot of uncertainty in terms of one-time spectrum fees because there have been several proposals as of now. One is that if you held a spectrum over 6.2 MHz that would be subjected to 1/10 spectrum fees. There is a different proposal for spectrum over 4.4 MHz and other spectrums for the one-time spectrum fees.

If it’s just over 4.4 MHz or 6.2 MHz, players like Bharti or Idea will have the minimal impact and also it depends on the remaining life of the license. If it’s 20 years from now then probably all the players will have a similar impact. But if it’s only for the remaining period players like Bharti, Idea tend to benefit, whereas players like dual technology operators, RCom which have a longer tenure remaining for their license period will be at the losing end.

So just say for the remaining period of license fee I think an impact of say Rs 10,000-12,000 crore for both Idea and Bharti and above say Rs 20,000-25,000 crore for RCom is what we are looking at.

Q: Just wanted to focus on what your preview might be for earnings season from the telecom space. How are you placed in terms of possible outperformer?

A: We are expecting a 4-5% revenue growth for all the telecom operators that will be on the higher side for Bharti and Idea and probably on the lower side for Reliance Communication.

We are expecting about slight pressures on the Average Revenue Per Minute (ARPM) and given that the telecom competitive intensity is once again increased after the 2G license were cancelled by the Supreme Court. So, there could be some pressure on the ARPM. Our top pick remains Bharti with a target price of Rs 420.

Q: Just to come back to R-Comm if indeed they are able to garner say 700-800 million is that by a way of reduction in debt already in the price?

A: Its there in the price and probably debt is one issue for them, which is about Rs 37000 crore. If they are able to list the entity and reduce the debt, that will be a small step towards debt reduction. I think the larger question or the larger concern for R-Comm is that if we actually look at operating performance of the company for the last 15-16 quarters, the topline has been pretty much stagnant.

However, the EBITDA has declined by almost 80-90%. That's a larger question for the company because the kind of subscriber quality that it has is much inferior to the leaders in this space. Even if the debt question is put aside, your fundamental performance is again in question. I don't think there is much positive triggers for the stock.

Q: You don't have larger worries that if the EBITDA is falling the way it is, there will be a debt servicing problem?

A: I absolutely agree. My point of view was that the debt problem has been there in the market for quite sometime. It has been pretty much deliberated upon, but what probably the market is ignoring is that the revenue has been pretty stagnant and the business is not growing for the company. That's another looming concern for the company.

Q: Just wanted to come back to OnMobile. You said you can't comment on the news. How would you be placed on the stock in terms of fundamentals? We understand that they have strong cash on books?

A: We continue to like the business model specially because in the last two quarters, the overseas operations have started to grow very handsomely and started to contribute meaningfully to the operating performance of the company. But we had advised our clients to exit the stock when the news broke out. So we do not quote the target price to the stock right now.

Q: I didn't hear what you are expecting from Idea in the current results season?

A: For Idea we have a growth expectation of about 4.6% on a QoQ basis. The PAT is expected to grow much higher because last quarter they had a one-time provisioning done for the license cancel. We are expecting about Rs 300 crore odd PAT for the company.

Q: If the reserve price came to be the way in which the TRAI has recommended, would all your bets be off on all the telecom companies?

A: No I don't think so because the reserve price agreed that its on a pretty higher side. But, one point is that if the reserve price is set so high, you see a lot of international players who were new players, have already stated that they would not really look at participating in the auction.

I also don't see much of the incumbents participating at such high prices. So there is a good possibility of not seeing a lot of active participation if the reserve price is high. Then, subsequently the reserve price would be lowered and that's one point.

The other is, even if the reserve price is set so high and the spectrum is traded at such high prices, with the kind of financial muscle that Bharti Airtel have, it will probably be able to take the step ahead and do away with such high reserve prices. But, for the other telecom operators, it will be a much larger problem. I think that it's much talked about because once it's done with, people will start taking a fresh look at the telecom sector.

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