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Last Updated : Feb 27, 2017 06:35 PM IST | Source: CNBC-TV18

Tulsian tells: Why pressure on telecom margins will continue

As the telecom sector undergoes consolidation, margins of the companies will continue to remain under pressure, said SP Tulsian of sptulsian.com. The debt-laden balance sheets is seen as a 'big scare'.

As the telecom sector undergoes consolidation, margins of the companies will continue to remain under pressure, said SP Tulsian of sptulsian.com.  The debt-laden balance sheets is seen as a 'big scare'. 

While consumers will benefit from this consolidation and price war, financials of these telcos will be impacted, he added. 

Below is the transcript of SP Tulsian's interview to Anuj Singhal and Surabhi Upadhyay on CNBC-TV18.

Surabhi: What do you make of this move on Reliance and the kind of counter move that we are seeing in the banks today? What is your sense? Some of the fundamental reports that came in, in the morning are giving a Rs 1,500 plus kind of a target to the stock. Do you see that happening in the near-term?

A: In fact, we need to define the near-term. In fact, last week when we have seen the renewed buying coming in largely on the institutional buying having seen in the Reliance Industries, I have said that probably I will set my target of Rs 1,250 maybe till we see the Q4 numbers because that is the timeline I am taking. In fact, Rs 1,250 has seen having met today on Reliance Industries and we are seeing the Rs 1,500 as the target having set by the investment banker or maybe the big broking houses.

But I will not be taking my call beyond Rs 1,250 for the simple reason that you cannot attribute a value beyond a point for Reliance Jio. Whatever we are seeing now is seen coming in only because of Reliance Jio because we have discussed when Mukesh Ambani had his conference where the tariff plans were announced that the company is going to see the revenue flowing in from April 1 which was seen a big uncertainty because this was seen as a drain that the company will not be able to earn any kind of income.

So, in this background, I will be keeping my view on the stock at Rs 1,250 purely on a fundamental basis because now, you have to apportion the Rs 4 lakh crore market cap plus Rs 1 lakh crore net debt that is enterprise value (EV) of Rs 5 lakh crore into three business mainly that is refinery, petchem and Reliance Jio. And if I broadly assign those valuations, Reliance Jio gets a valuation of closer to about Rs 1,90,000-2,00,00 crore which is the actual cost of investment having made by the company.

So you cannot really stretch beyond a point and I will be keeping my view that Rs 1,250 should be the target which I will be looking for till Q4 number comes out, gets declared by the company.

Anuj: You track both Bharat Financial Inclusion and RBL Bank, do you think this kind of deal makes sense, RBL Bank also entering into the fray?

A: RBL Bank earlier have already acquired a minority stake in single digit, if I am not mistaken about 9 percent in a micro finance company. So they are definitely seen eager, number one. Number two, if you see RBL Bank, they are having a very strong rural presence because Ratnakar Bank used to be in western Maharashtra earlier where the rich sugar belt used to exist like Satara, Sangli, Kolhapur. So, they know the pulse of the rural market and the microfinance needs that kind of quality, number two.

Number three, in fact market is also flooded with the rumour that RBL Bank is also contemplating a preferential issue or maybe the qualified institutional placement (QIP) at Rs 550 and so, people have been talking of some inorganic kind of acquisitions to be seen by RBL Bank. But here I would like to add two points. If you see in Bharat Financial Inclusion, there is no promoter, 2 percent is the promoter stake.

So, sometimes I wonder that how this whole acquisitions or the takeover will all be structured and what kind of fund infusion whether the company, because if you take a market cap of RBL Bank, it is closer to about Rs 18,000 crore, for Bharat Financial Inclusion it is closer to about Rs 12,000 crore.

So, does it mean that RBL Bank will not be requiring a big amount of money if they want to acquire the management control because then it has to be with the consensus with the existing management of the company of Bharat Financial Inclusion because as I said, the promoter stake is just at 2 percent and probably that will see acquisitions coming into the fold of Bharat Financial Inclusion coming into the fold of RBL Bank. So yes, it is possible, but only the broad contours of the acquisitions or takeover of this deal has to be understood.

Anuj: This telecom war is getting hotter now. Bharti Airtel, their official press release statement is that they have declared war on roaming.

A: This tariff war is not going to end and that is what I have said that you need to cap the valuations of all these telecom companies at some point. And if we take a valuation call on Reliance Jio, the only plus point is that they will keep offering 20 percent higher than what other competitors or what other incumbents will be offering them.

So, overall the pressure on the margins of the telecom companies is going to continue in the time to come and their debt ridden balance sheets is really seen a big scare, so I am not surprised. This will, naturally in the process consumers will be seen the biggest winners but that will be seen hampering the balance sheet and profitability of all these telecom players.

Surabhi: A quick follow up question on this. All this talk of consolidation, the initial view that was building up was consolidation is great because somewhere it is going to put an end to the tariff war. That, for what it is worth, does not seem to be happening immediately looking at the kind of statements that are coming in. So, given the rally that we have seen in stock prices, is the best behind or is this just a minor hiccup you think? How is the market going to interpret this sort of a release?

A: First continuing with Anuj's point, you cannot see the radical or aggressive kind of cutting going forward. All these minor offers or maybe the minor rate cuts will all be seen going forward, number one. Number two, I think that whole of FY18 because the offer, counter-offers will keep coming in, maybe Reliance Jio if not in this financial year, maybe once they launch the scheme, you will be seeing the counter-offer coming in. and this bits and pieces, the kind of bits and pieces offers now made by all these telecom companies will keep denting their margins, will keep denting their average revenue per user (ARPU).

So, I think the market has to cap at some point of time. Maybe we can see the technical bounce which you have seen in case of Bharti Airtel seen coming in or maybe with Reliance Jio having clarified that they will start charging from April 1, other telecom companies saw a sigh of relief that at least the free offer is coming to an end on March 31.

So, even with a marginal cut or maybe marginal, these kind of offers coming in, I am seeing this as a big negative for all these telecom companies because they will keep denting their margins which will not get liked by the market the moment we will see these companies declaring their quarterly numbers.

Anuj: 40 percent higher for this month for Vijaya Bank. Is the street getting too excited about last quarter numbers or do you think this is justified?

A: Maybe you can say that the little over exuberance has been seen in the midsized PSU banks whether you talk of Bank of Maharashtra, Vijaya Bank. I do not think that or maybe you can draw a conclusion that on a relative basis, if you take a call on the larger PSU banks now like Punjab National Bank (PNB), Bank of Baroda, State Bank of India (SBI), they are looking much better because this may be one-off quarterly numbers.

I am not saying that the asset quality and the performance have not been good from a few of these banks, but the kind of rise which we have seen is not warranted and I am keeping my stance more on the larger size of the PSU banks like 4-5 PSU banks like Bank of Baroda, Bank of India, SBI, PNB kind of things.

Anuj: Quick thoughts on this stock and this deal that PTI is flashing that it could be a Rs 44,000 crore deal?

A: Actually, none of the figures are matching because as you have analysed that Rs 57,000 crore is the market cap. So, there is no question of saying that the entire Hindustan Petroleum Corporation (HPCL) is being valued at Rs 44,000 crore. And now, if I say that the company will acquire the government of India\\'s 51 percent stake, that also works out closer to about Rs 30,000 crore and that may see the open offer coming in or I do not know whether it will be termed as within the same promoter.

So I do not think that this Rs 44,000 crore gets connected by either way. So, maybe the confusion persists on that account.

Anuj: We now have the clarity on math. What this PTI report is talking about is taking current market price and they are talking about paying Rs 29,000 crore for 51 percent stake and Rs 15,000 crore roughly for the open offer of 26 percent hence taking it to Rs 44,000 crore.

A: That is what I said that this will trigger the open offer because though the change is happening within the same promoter, but that is what I said that this probably will trigger the open offer. But again, the stand or the point is that 27-28 percent is held by the institutional investors, about 17-18 percent is held by foreign institutional investors (FII) and about maybe 10-11 percent are held by Indian mutual funds and all that. So, I do not think that that much amount will be required to be shelled out by Oil and Natural Gas Corporation (ONGC).

So yes, if they acquire it for Rs 44,000 crore and 77 percent of that, again with a caveat that they have to bring it down to 75 percent can be considered as a likely move by ONGC.

But here, I want to add one point because if you see in the ONGC shareholding, Indian Oil Corporation (IOC) is holding a large chunk and actually for last 3-5 years it was being talked that if ONGC has a cash surplus, they should go for the share buy back or they should buy back the shares from IOC because all thee oil marketing companies now holding a minority chunk in ONGC also does not hold any meaning. But anyway, if we just focus on HPCL deal then probably this can be the broad contours of 51 percent plus 26 percent open offer.

Surabhi: I will ask you a very simple lay man question. I was going through the details, fine so if this kind of a deal goes through ONGC gets about 23-24 million tonne of refining capacity, it becomes the third largest refiner of the country: Reliance, IOC and then this combined. What does it really bring to the table for shareholders? At least right now, as an individual shareholder, I could choose to buy whatever side of the businesses, look in more profitable, if oil prices are high, realisations are better, I could have bought upstream, if the refining cycle was looking smarter and there were large inventory gains expected, I could buy downstream. What do I get as a shareholder with this large combination? It makes for a great headline and a great statement perhaps, for the government of India, what does it mean for the shareholder?

A: If you see, ONGC is already having 81 percent stake along with HPCL in ONGC also. So, I do not understand the logic. And if you really take the oil marketing company scenario, HPCL is controlling maybe about 25-27 percent of the total refining capacity as well as the marketing outlet. So unless and until ONGC really go and acquire HPCL and BPCL, both to have a significant capacity or maybe IOC to have a capacity of about Rs 55 percent market share then it holds value.

Because what will be then status of the Bharat Petroleum Corporation (BPCL) and IOC, will they remain as a standalone company? I do not think this gels well with the synergy of exploration and the oil marketing company of acquiring just one oil marketing company (OMC) amongst the three.

Disclosure: Reliance Jio is part of Reliance Industries which owns Network18 and moneycontrol.com

First Published on Feb 27, 2017 06:14 pm