Prefer Idea over Bharti: Kotak Institutional Equities

Vodafone India's slashing of 2G data charges by 80 percent is  more about growing the data market than about average revenue per user (ARPU), said Rohit Chordia, Associate Director, Kotak Institutional Equities.

Commenting on the recommendations that Foreign Direct Investment (FDI) in telecom be hiked to 100 percent from 74 percent, Chordia feels it would be make like easier for companies like Vodafone, Unior who have been concerned on who their minority partners should be. Whereas, for companies like Bharti Airtel, Idea Cellular, Reliance Communications there is substantial scope for FIIs to build positions because they are nowhere close to 74 percent FDI limit. Rupee depreciation, from a Profit and Loss (P&F) perspective does not impact much but it does impact the fair value. The P&L for some of them are hedged and accounting policies also allow them to take the translation impact to the balance sheet called foreign currency translation reserves. For example, "Re 1 movement in the rupee dollar rate impacts Bharti’s fair value by around Rs 2.5 per share." Stock specific, they prefer Idea Cellular over Bharti Airtel, although they are positive on both. They have a sell on Reliance Communications. Also read: Telcos spar over roaming charges Below is the verbatim transcript of his interview on CNBC-TV18 Q: With reference to yesterday’s news Vodafone slashing the 2G data tariffs by 80 percent in three of their circles. If this becomes a pan India phenomena what will be the impact? Do you see the start of competition in the operators on the 2G data side? A: You have to look at the data side of the business slightly differently as compared to voice because in data a bulk of your users in terms of heavy users of data they typically sign up for packs. Pricing is typically an entry strategy, so a reduction in this is clearly to get more customers into the data fold. So I won't read this development too negatively and in any case Vodafone has done it in only three circles yesterday. It is more about growing the data market right now than looking at the average revenue per user (ARPU) you are necessarily getting because what you want to do is get more customers in and convert them into commitment packs where they sign up for a monthly pack or a weekly pack. Q: So, are you saying it will not impact bottomlines of too many companies? A: It might but even after the reduction yesterday, on the pay as you go model you are talking only about 2 paise per 10kb, which is still significantly higher than the current blended realisations that they get on data, in terms of rupees per MB so nothing meaningful there. Q: What about the recommendation that Foreign Direct Investment (FDI) in telecom be hiked to 100 percent from 74 percent? It was a torturous path even to get the current increases in telecom FDI; do you see it getting passed? Should an investor get excited and will it be used given the rather sorry record in terms of how foreign investors were treated in the spectrum rounds? A: Very difficult to say whether it will get passed or not. The concerns on 100 percent FDI in telecom are typically around difference in security issues, which is why Department of Telecommunications (DoT) has sought the perspective of the Department of Finance and Department of Defense on this one. When you are talking about 100 percent FDI you are talking about strategic investors. Because if you look at Foreign Institutional Investors (FIIs) today they still have substantial scope to build positions in Bharti Airtel, Idea Cellular, Reliance Communications. They are nowhere close to that 74 percent FDI limit in that sense. Then it comes to the question of if they make it 100 percent life will probably become little easier for some of the current telecom companies like Vodafone. They have had this issue with who the minority partner in India would be and also someone like a Uninor, who had to search for a minority partner in India. So, some of those issues go away. On whether it will necessarily attract new strategic investors to the market? Looking at how competitive the market is and where the return ratios in the sector are, I would think that would be a stretch. Q: Yesterday we also got the news that the government is likely to consider the talk about the third round of spectrum auction on June 26. Based on the Telecom Regulatory Authority of India (TRAI) stance which at least for once has moved away from being very government centric and populist and looked at the economic feasibility of the operators - can we expect a little more benign reserve pricing in the third round of spectrum auction given the first and second failed? A: There are two things there; one, doing the right thing for the sector. When I say the sector there are three interests that the TRAI has to protect; that is of the government, of the industry and consumers. It is a fine balance that they need to strike. Two, spectrum pricing cannot be set in isolation. Operators still need to participate and make those reserve prices spectrum prices. In a sense put stamp on it that they are ready to pay those kinds of spectrum prices. And operator’s decision is driven by the business fundamentals. So this is going to remain a little bit of cat and mouse game in my view. Q: To get back to the Arvind Mayaram recommendation - you are not seeing any increase in dollar inflows on account of this, may be a year down the line if at all it is passed? A: Very difficult to say but I will not expect anything in the next one year. _PAGEBREAK_ Q: The rupee impact that is the other big problem that is impacting balance sheets across this sector. Because of this have you lowered your EPS forecast or even changed your rating on any of the biggies? A: No we have not. Among the biggies, the magnitude in terms of the pecking order, in which they get impacted - Reliance Communications gets impacted the most in terms of the impact as percentage of their share price, then is Bharti and Idea gets impacted the least. The impact is more on their balance sheet which is essentially the carrying value of their dollar denominated debt goes up. On the Profit and Loss (P&L) some of them are hedged and accounting policies allow them to take the translation impact to the balance sheet in what is called foreign currency translation reserves. So from a P&L perspective, the rupee deprecation does not impact much but from a fair value perspective, it does impact. So say Re 1 movement in the rupee dollar rate impacts Bharti’s fair value by around Rs 2.5 per share. To that extent the market has punished Bharti. Q: On the P&L? A: P&L impact as I said is very difficult given very complex foreign exchange accounting policy, given that we do not know what hedges they hold. Essentially it is complex because you are dealing with multiple currencies; in case of Bharti may be more than 10 currencies. Secondly because of the accounting choice available to them they can take a bulk of their translation impact through the balance sheet. We have not had any historical trend, which suggests that rupee depreciation is necessarily negative from a P&L perspective. Q: What are your buys and sells? A: We like both the incumbents Bharti Airtel and Idea Cellular. Our preference has been Idea over Bharti. However, given Idea’s very solid out performance in the past few months, we are probably turning neutral between the two. We are positive on both and we have a sell on Reliance Communications.