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Which Path Indian Telecom Companies – Digging Hole for Themselves?

Lately, we are seeing telecom companies cutting voice and SMS rates in an attempt to keep up with one another. The main focus in these rate cuts is to ensure that they maintain (or increase?) their market share. The rates are now being calculated in paisa per second for voice and one paisa for one SMS message. Coming from the consumer side these are best times to be using cellular phone for communication. To me, pricing these services in terms of paisa and seconds means this is practically free, relative to what a rupee can buy in today’s market. More so, when you start thinking about the capital expenditure in developing these communication networks and licensing fees involved.

As an investor, I believe these telecom companies are digging their own grave. These do not seem to make any economic sense. You will not find Rs 5 cutting tea on the roadside, but you can use a high tech wireless communication network for 30 minutes for less than Rs 5. Something is missing here. The rates for making calls were already among the lowest in the world. Now, this mad race will bring it down further, and will perhaps make them the lowest in the world. I am passing few of the publicly traded companies through my stock screen to see if it generates interest in me.

Bharti Airtel:

  • Operating Cash flow (positive and growing trend, growth rates are slowing down)
  • Debt (currently manageable but room for error is less. cash flow is 1.5 times debt, high reserves is negated by liabilities)
  • Dividends (one time only, not favorable)
  • Reported Net Profit (positive and growing trends, and below operating cash flow)
  • Margins (good margins, above 20%)
  • Capital Usage (good)

 

Idea Cellular:

  • Operating Cash flow (positive and growing trend, growth rates are slowing down)
  • Debt (increasing but currently manageable, less room for error, cash flow is 0.38 times debt)
  • Dividends (no dividends)
  • Reported Net Profit (positive and growing trends, and below operating cash flow)
  • Margins (good margins, mid teens to mid  20s)
  • Capital Usage (acceptable)

 

Reliance Communications:

  • Operating Cash flow (positive but reducing trend)
  • Debt (high, cash flow is 0.06 times debt)
  • Dividends (yes, but not good quality)
  • Reported Net Profit (positive and growing, but above operating cash flow)
  • Margins (good margins, mid teens to mid  20s)
  • Capital Usage (very low)

 

TATA Communications:

  • Operating Cash flow (positive and increasing trend)
  • Debt (high, cash flow is 0.47 times debt)
  • Dividends (yes)
  • Reported Net Profit (positive, and above operating cash flow but has been less twice)
  • Margins (acceptable margins, mid teens)
  • Capital Usage (very low)

 

Mahanagar Telephone Nigam Limited:

  • Operating Cash flow (positive, but dropped in 2009)
  • Debt (low and practically zero)
  • Dividends (yes)
  • Reported Net Profit (positive, and above operating cash flow)
  • Margins (poor relative to peers, single digits)
  • Capital Usage (very low, in low single digits)

 

This screen shows me except Bharti Airtel, none of them have any qualities that I am looking for as a long term investor. In case of Bharti Airtel, even if it were trading in my fair value range, I would not initiate a new position at this point in time. My stock screen shows it is a very well managed company, however, the trends are not in its favor. Its reserve appears to be high which most likely gives an impression of great balance sheet. However, the liabilities will balance out the reserves. The best aspect about Bharti Airtel is that it is generating substantial cash flow, which allows it to service its already low debt. The average revenue per user is continuously going down. And it can no longer bank on continued increase in subscriber. Half of our country already has a cellular phone, and hence the subscriber growth rates will slow down. In addition, I expect the price war to cut its cash flow. Furthermore, whenever it rears its head for acquisition (e.g. twice for MTN), I makes me worry about the price it will pay.

 

For my buying objectives of long term buy and hold, all telecom companies, are not worth a consideration. These telecom companies are going down the path of Airline companies. Almost all airline companies are in red now. Jet Airways was well managed and profitable company (same like a Bharti Airtel); but competition, mad race for price cuts to keep market share, and Sahara acquisition messed it up.

 

So, for now, telecom companies will not be part of my hunting ground.

 




Disclosure: No positions in any of stocks discussed above