Bearish bets weigh on telecom shares

Stocks tank amid concerns of tough competition in spectrum auction following the entry of Reliance Jio

Traders created aggressively bearish bets on shares of telecom companies, which slumped on Thursday on concern over stiff competition in the spectrum auction next month, with Reliance Jio Infocomm joining the fray.

Analysts said Reliance Jio’s surprise entry had raised the possibility of higher bidding prices at the auction. Shares of Bharti Airtel dropped 4.8 per cent to Rs 315.50. Idea Cellular dived 7.2 per cent to Rs 156.05. Reliance Communications declined 4.2 per cent to Rs 121.50. The Sensex ended marginally lower.

Credit Suisse downgraded its rating on the sector to ‘underweight’, while cutting its 2014-15 earnings estimates for Bharti by 22 per cent and for Idea by 27 per cent. “With spectrum prices lower and industry conditions (including tariffs) better than 2012, RIL now seems keen to acquire additional spectrum. The immediate impact is that of intense competition in auctions. The longer-term impact could be increased competition and higher capex for incumbents,” said Credit Suisse’s analysts Sunil Tirumalai and Chunky Shah, in a client note.

Analysts said Bharti’s stock futures saw the highest build-up of short positions compared to peers on Thursday. Open interest in Bharti’s January stock futures rose 19 per cent, which along with the drop in prices suggests creation of bearish positions

“Going by the amount of shorts, it looks like Bharti will fall below its strong support of Rs 310.

If that happens, it would weaken to Rs 285,” said Siddarth Bhamre, head-derivatives, Angel Broking. Credit Suisse downgraded its rating on Bharti to ‘neutral’, with a price target of Rs 310. The investment bank also downgraded Idea to ‘underweight’, with a price target of Rs 130.

In Idea’s January stock futures, open interest was up eight per cent. Bhamre said Idea shares had fallen below a key support of Rs 160 on Thursday.

“This does not augur well for the stock and could fall to Rs 140-145,” he said. Reliance Communications, which fell the most on Thursday, saw the least build-up of short positions in its futures contracts.

Deutsche Bank said 2014 is likely to shape up as a memorable year in the history of the Indian telecom industry, a key reason to remain cautious on the stocks. “Incumbents face challenges on multiple fronts, including rising capex and minimal increases in margins from the current levels. While valuations are at historical averages, we see a low chance of outperformance,” said Deutsche’s analysts Srinivas Rao and Amyn Pirani in a client note.

The bank, which has ‘hold’ ratings on Bharti and Reliance Communications and a ‘sell’ on Idea, said Reliance Jio’s entry could materially lower the data tariff table and affect incumbents’ margins.