Time To Go Long Indian Telecom Companies?

Includes: TCL, VOD
by: Emerging Money

by Mitchell Hall

Indian telecom companies may have bottomed out after India's botched spectrum auction, and with smartphone sales in emerging markets set to jump next year, and India (NYSEARCA:EPI) touted as the top BRIC market for 2013, investors with a long term horizon may want to start doing their due diligence now.

Last week saw a spectrum auction that failed miserably to clear the available inventory, with the Indian government only raising $1.7 billion thanks to over-inflated prices, less than a quarter of what it was optimistically hoping for. The three largest telecom companies, Vodafone (NASDAQ:VOD), Bharti Airtel, and Tata Communications (NYSE:TCL), all balked at the government's sticker prices.

The Financial Times Beyond Brics blog notes that India's telecom companies are facing what could be their weakest quarterly revenue performance in three years: is the worst now over?

The market seems to think so. Bharti Airtel, the nation's largest operator by revenue, has seen its stock rise by more than 10% since day one of the auctions last Monday, after which it was clear the contest would be exactly the type of damp squib most analysts expected.

A second auction to sell the unsold spectrum is likely to depress prices further, with Bharti well placed to benefit from cheaper renewal prices for its existing licenses.

Market mood is certainly improving around Indian telecom companies after last week's shambles.

That's not to say it's definitely time to jump in boots and all. The Indian government, not famous for its competence, hasn't yet confirmed plans for a second auction, and probably won't until next week at the earliest.

But consider that according to a Digitimes Research report, worldwide smartphone shipments are set to expand by 30.2% to 865 million units next year -- 43.9% of total cellphone shipments -- with strong demand from the likes of China and India largely responsible for the increase thanks to their low current smartphone penetration.

New spectrum + more smartphones = increased data use and fatter margins for telecoms.

And JPMorgan rates India its top pick amongst the BRIC countries for next year, owing to its easing monetary climate and improving policy.

BusinessWeek reports that,

The BSE India Sensitive Index has rallied 18% this year, more than any other benchmark gauges for Brazil, Russia and China, driven by foreign fund flows and government policy measures unveiled since mid-September.

The 30-stock SENSEX trades at 15 times estimated earnings, compared with a multiple of 16 for Brazil's Bovespa Index, 5.6 for Russia and 9.6 for China. The MSCI Emerging Markets Index (NYSEARCA:EEM) trades at a multiple of 11.2, the data show.

If this is a bottom for India's previously high-performing telecom companies, then the macro environment next year looks positive for investors looking for a long-term trade.

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