Telcos with stretched balance sheets to face problems: UTI MF

Given the type of competition now, especially on the data front, it is quite clear that players with stretched balance sheets will have problem if this continues for a while, says Swati Kulkarni, of UTI MF on the Indian telecom industry.

Speaking to CNBC-TV18 she said that post demonetisation the fund is now slightly overweight on IT and have started adding pharma stocks as well.Below is the verbatim transcript of Swati Kulkarni's interview to Prashant Nair and Ekta Batra on CNBC-TV18. Prashant: What are your thoughts on some potential consolidation in the telecom space? We have got four large players, Bharti, Vodafone, Idea and Jio. It has been long speculated, it is not new but it has picked up steam with lots of brokers writing reports on the fact that Idea and Vodafone – what would a potential combination of Idea and Vodafone look like, how would it change the industry structure etc. What are your thoughts? A: At this point of time, very speculative on my part to talk about a specific thoughts or rumours that maybe there in the market but in general I can talk at the industry level that given the competition that we are seeing especially on the data front, it is quite clear that the players with stretched balance sheets will have problems if this continues for a while. The investors probably are attributing this to a potential consolidation in the industry but beyond that I don’t think we should be reading too much into it because it is stock specific. Ekta: Would you be a buyer of telecom stocks? A: We have maintained an underweight on telecom because we think that the near-term pressures are too much and one has to look for a much longer period to stay invested in telecom and hence at this point of time probably we are not looking at it but if further correction maybe that space might look attractive from a five-year perspective. Prashant: If the number two and number three player comes together, you don’t have to name anything, would investors look at the sector more favourably? A: If you apply economic logic, it is logical that if there is a consolidation in a fourth and fifth players of the industry and that goes to three, the pricing power should return in that particular segment but then there are lot of bridges till that happens, the buyer and seller expectations have to meet and to speculate at this point of time would be not correct on my part and hence I want to not add any further comment other than it is logical that whenever there is a consolidation in the players, the pricing power should return. Ekta: Are you worried about your IT as well as pharma holdings ahead of Trump’s inauguration or maybe Trump taking over and what he could unveil in the next couple of months? A: If you remember we have been saying that especially my portfolio is pretty neutral weight on IT and I was underweight on pharmaceuticals. Now, post demonetisation I have made a shift to slightly overweight on IT and we have started adding pharma stocks also because if you see especially in the pharma sector there has been a good amount of correction and the stocks have corrected to a level where most of the risks and most of the issues around USFDA related delays in clearances and also the US based business coming under pressure seem to have started to get incrementally factored in and if you have a three-year horizon that space has started to show some opportunities. As far as the Trump related policies and uncertainties are concerned, what we know right now is the noise around the cost pressure that could come out of your H1 visas related regulations that could come -- one, in terms of the restricting the size of visas and two in terms of the minimum wages that will have to be raised from currently a medium level of USD 65,000 to about USD 1,00,000. So from that perspective, yes, there are cost pressures but if you look at the available talent in the industry in US, you go by the unemployment rate there is far lower in IT. So there is an issue as far as the skill availabilities are also concerned and I am sure there will be representation as far as that is concerned. So from that perspective, there will be an impact in the near-term of about 100-200 bps for companies varying depending on how much H1 they rely on but as you have a currency tailwind and you have the business picking up especially through the banks, which are in US are showing better numbers in revenue. We think that there could be an opportunity to absorb as you move forward and automate the businesses as well. So I would take it as a near-term uncertainty.