Telecom:A Volume Led Story.

By | November 8, 2008

We believe that the Telecommunication sector will outperform the market during the next 6-9 months as at current prices, telecommunication stocks are trading at a discount to the market’s P/E multiple. The average P/E multiple for telecommunication stocks is 10x against the market’s P/E multiple of 13x. Besides, the Indian mobile telecommunication sector continues to be a strong volume-led story with mobile telephone penetration rate still below 30%. We expect the number of mobile subscribers to grow 10% qoq till at least the end of 2010, driven by the availability of cheap handsets, the widening network coverage across the country, and a substantial reduction in tariffs.
In our view, large telecom companies such as Bharti, Reliance Communications, and Idea boast of a significant early-mover advantage in the face of expected competition from the likes of upcoming players such as Swan, Unitech, and Datacom. These companies have captured most of the creamy customers in the country and have substantially scaled up their operations in the last 4-5 years. Besides, they have already established a wide network across the country and own submarine cables across continents, thereby providing competitive tariffs to subscribers and achieving an average EBITDA margin of around 30%.
Furthermore, the upcoming 3G operations should boost their margins by enhancing the
contribution of Value Added Services (VAS) to the total ARPU from around 8% currently to 15% in the next 3-4 years. Other than this, these companies have a net debt/EBITDA ratio around 1, which can support their domestic CAPEX plans and international expansions in the other emerging markets of Africa and South-East Asia.

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