Telecom could be a dominant theme for markets in 2014

A benign regulatory environment and improvement in operating metrics could drive earnings upgrades

Telecom stocks, for long time, have been the ugly ducklings of the market. Listed telecom stocks have delivered seven per cent over five years, while the Sensex has returned 124 per cent in the same period. This was largely due to the sharp increase in competition after 2008, which eroded profitability. The sector’s fortunes changed after the Supreme Court cancelled 122 2G telecom licences in February 2012. Undoubtedly, the benefits of this decision have started to show in the current financial year (FY14), equity strategists believe things will only get better for sector in 2014. Telecom is expected to be one of the dominant themes in the coming year, as key developments start impacting financials.

The sector has been in the news lately for all the right reasons. While rationalisation of spectrum prices and the new mergers and acquisitions guidelines are known positives, several other themes will play out in the coming year. One of the big themes analysts expect will change the earnings quality is data usage. As penetration of smartphones increases, data growth will reach an inflexion point. Goldman Sachs expects data growth to drive consensus upgrades. The brokerage is 17-20 per cent ahead of Bloomberg consensus estimates on FY14-15 earnings. This mood is reflected in announcements made by telecom players, too. Vodafone has announced an investment of $3 billion over two years to upgrade networks and Airtel is also looking at investing in technology upgrade for a better customer experience.

The coming year will also see the entry of a new player in the data game, Reliance Jio, with its 4G offering. However, this is unlikely to impact existing wireless players, as Reliance is expected to focus on the mid-to-big screen broadband devices. Customers may continue to opt for 3G services for their smartphones, analysts believe.      

The relaxed mergers and acquisition rules, cleared by an empowered group of ministers on Wednesday, will drive consolidation in the industry. This will be beneficial for the large incumbents if they acquire smaller fringe players as that will give them better bargaining power in terms of tariffs. The new rules allow a player to have a marketshare of 50 per cent, unlike the earlier rule which capped the maximum marketshare one player could have at 35 per cent. Nomura believes that theoretically, one less player in the market should be good – but it would largely depend on who the buyer or the seller is.

Also, given the already stretched financials of most players, analysts do not expect irrational bidding during upcoming spectrum auctions. According to Sharekhan, player discipline and rationality would be keenly watched in the bid for the spectrum.