Not bullish on any Indian telecom company: Sachin Gupta, Nomura

Low data take-up, price declines and high debt are some of the reasons why the Indian telecom stocks do not look promising at the moment, says Sachin Gupta, Regional Head- Telecoms Research, Nomura. Edited excerpts from his chat with ET Now:

ET Now: The performance of Indian telecom companies was disappointing and highlighted structural issues faced by companies as well. Have you changed your outlook on the sector, and is the de-rating of the stocks enough for now?

Sachin Gupta: We have not changed our outlook for the sector. We have been bearish on Indian telecom firms for about 12-18 months now, and the past two results show competition still exists. It is not as bad as it was in 2010 when the price cuts were 15%-20%, but we are still witnessing 3%-4% price declines in every quarterly result.

The other issue is the relatively low data take-up. We have had 3G for the past two years now, but still there are carriers who are running between 3 and 4 million 3G subscribers, and that has limited the potential revenue surprises.

ET Now: Margin compression for Bharti was sharper than expected. Their EBITDA margins have contracted by about 4% for the quarter gone by. What is your take on operating profit margins and EBITDA margins for Bharti going forward?

Sachin Gupta: Bharti’s numbers can be split into two parts.

The margin in the domestic wireless business in Q1 declined sharply which is a function of Bharti changing the strategy to regain revenue market share. As part of their strategy to win back revenue share, they have had to incur higher costs on the SG&A, network cost, etc. Therefore, we can expect some uplift in the margins. But it will not be significant within the domestic market alone. Therefore, around 30% to 32% is a reasonable outlook in the near term.

The big delta for Bharti will be in the African business. They made this acquisition two years ago and since then, we have seen a margin improvement every quarter, except last week when they saw a 200 basis point decline. There were some one-offs in there, but the competition or the elasticity argument is not holding to the extent we had all anticipated. That said, 25-26% margin in Africa still seems quite low, and that is where the positive surprises are likely to come from. Realistically, that business can easily go up to 30+ margin in the next 12-18 months.

ET Now: Are valuations at 18 times for Bharti sustainable? What will make you turn positive on this stock then?

Sachin Gupta: Valuation is obviously driven by the earnings. It has been difficult for the analysts to get the earnings forecast right in the past 2 years. Most people have given it the benefit of the doubt, but the numbers have been weaker than expected.

If you look at the earnings provision, there has been about 60%-70% negative revisions in the past 12 months alone. Therefore at 18 times, it is not a cheap stock given the lack of visibility on the near term earnings outlook and also given the regulatory overhang in the domestic market.

ET Now: Now there are some reports that Bharti could be looking at filing for RHP for the tower business. Will this help the Bharti stock?

Sachin Gupta: Absolutely. Bharti is currently facing challenges on these high gearing levels. There is about $13 billion worth of debt on its balance sheet, and the intention is to deleverage that in the near term. One of the ways of doing that is selling some assets like the tower businesses.

However, the market conditions are not favourable. They may not be able to optimise the value of these networks or towers in the current market conditions. Also, the underlying performance of the tower businesses has been relatively muted. Metrics like the tenacy ratio is still tracking at 1.8-1.9 times. That is below what the market expectation would have been 2 years ago at around 2 -2.5 times. But it still would be a positive catalyst if these cuts can get a decent valuation and deleverage the balance sheet.