Bullish on telcos; bet on Rcom for short-term: ICICI Direct

Karan Mittal, research analyst, ICICI Direct says investors can buy Reliance Communication from a short-term perspective as the stock is now showing momentum. "RComm deal with Reliance Jio Infocomm will help in pruning the former's debt," he said in an interview to CNBC-TV18.

As the earnings season is about to take off, Mittal expects the telecom companies to post positive net additions. With almost all telecom companies hiking tariff  rates and expanding average revenue per minute (ARPM), investors can look to buy the three telecom stocks-Idea, Bharti Airtel and Reliance Communication. Below is the edited transcript of Mittal’s interview to CNBC-TV18. Q: What is the view on Reliance Communications itself with this proposed sale? Will there now be a perceptible change in the company’s leverage? Would you turn positive on the stock? A: The very first positive was the deal with Reliance, so we have come with a buy update there itself. Yes, it is a very good initiative. I am not very sure if this deal would materialise, because we have not really got any confirmation from the management. However, the figures look nice and it will definitely help RComm in pruning its debt. It will obviously wipe off from Rs 2200 crore of annual EBITDA from RComm’s P&L. So, we will have to weigh the pros and cons. However, from the debt perspective, it is a positive deal. Q: So, you are positive on the stock? A: Yes, the momentum is with the stock and from the short-term perspective, we do like RComm. However, from a longer term period, we will have to see what are the integrities of the deal with RIL and how the revenue sharing pans out with them. It is yet to be seen how the deal works out because Rs 1200 crore which has already come in RComm, is a small amount given the debt which RComm has. Q: Is there a case for increasing the target price on RComm in light of how serious the management has suddenly turned about reducing the debt? Just one week back it was the deal on Reliance, then in the last two-three months they have been working on Batelco and then we have been continuously getting headlines about the selling of stake in Reliance Global. Apart from that, even now there is talk about selling the DTH business. So, if the management is getting very serious about reducing their debt, does it make sense to preempt the stock run up and perhaps turn little positive on RComm? A: Talks have been going around for almost two years now for some kind of a stake sale. So, unless something materializes, it will be too early to take a long-term positive call. There is just one deal that has actually happened and that is just Rs 1200 crore that has come in. So, we don't even know what will be the long-term possibilities for the revenue agreements between the two telecom companies. As far as the stake sales in other units are concerned, we’ll actually wait for the deal to materialise. Q: Can you give us your views on the performance in Q4? Are you expecting it to be a tad better than Q3 for the big three? A: One thing that is positive, which has happened in this quarter is the net additions for all the incumbents have actually turned positive because last quarter was negative. Though the industry continues to remain in the negative zone, but the net adds for all these are positive. So, that is one good factor. The other is we have already seen a tariff hike or the discounted vouchers being cut down, so one will also see an expansion in average revenue per minute (ARPMs). But that expansion in ARPMs could come at a cost of reduced minutes of usage. The other part is, one could see some decline in the margins owing to higher marketing spends or the diesel component that will also play a part in the margins. So, we are expecting some kind of a tone down in margins. _PAGEBREAK_ Q: How significant could be the improvement in the voice RPM due to the reduction in minutes because in Q3 we had seen the beginning of freebies getting reduced but it didn’t flow through that much in the revenue per minute? In Q4 how much will it be and going forward the trend in RPM? A: We are expecting a one to three percent expansion in ARPMs. Now, when one says reduction was there in Q3, I think that was towards the fag end of Q3, probably towards December. So, this would be the first quarter when one will actually see the complete impact of reduced discounted vouchers. At the ground level, it did not really materialise in December quarter but then, one can see some of the vouchers which either they have reduced the validity or they have increased the call charges. So, that should flow into the ARPMs. Q: Today there was one refreshing news item which perhaps will solve this spectrum price as well as this interconnectivity trading triangle. Montek Singh Ahluwalia suggested why not auction spectrum with the understanding that it can be traded. All these big changes in policy always begin on this small note All these have small beginnings. Are you positive on this development as cutting through the impasse and the problems that have ridden the industry? Will you therefore turn positive on the sector as a whole? A: When it comes to this particular news flow, there has been a lot of talk around sharing of spectrum or trading of spectrum that is already envisaged in the new telecom policy. However, nothing has materialised as of now. So, it is a small starting step and could be a huge positive for this sector but then we’ll have to wait and watch whether it actually materialises or not. As far as the overall telecom sector is concerned, we are bullish on the sector per se but then there are a lot of regulatory uncertainties which have cropped up. So, be it from spectrum pricing or spectrum sharing or even one time spectrum fee, thses things do tend to dent investor confidence. So, we’ll have to wait and watch but then on a long-term perspective, we are positive on all the three stocks. Q: If 3G interest circle roaming agreements (ICRA) are banned what will be the revenue as well as the EPS impact on the top three – Bharti Airtel, Idea Cellular and RComm? A: RComm doesn’t have ICRA, so there will obviously be no impact. However, as far as Idea and Bharti are concerned, for Idea, the quarterly impact will be of Rs 50 crore and Rs 80-90 cror efor Bharti Airtel. So, that could translate into 0.5-0.7 percent of EBITDA margins. As of now, the impact may not look to be too huge for the companies, but going forward it will obviously hamper the data growth for these companies, especially in a scenario where in there is one operator who is coming with a Pan India broadband spectrum. So, from a longer term perspective it could be negative. Q: The Supreme Court will be hearing a plea on Sunil Mittal. How much of a sentiment impact will that have? A: That is already positive impact. Had this plea not been admitted, Sunil Mittal would have to appear before the 2G court. So, that is a positive but if he has to actually face the 2G court, that could have a negative impact on these stocks and also for Idea. Q: So what are your buys and sells in that space? A: As of now, we have buy on all the three telecom entities but our top pick would be Bharti with a target of Rs 385.