Telecom stocks have been plunging since last few days, but this has come as little surprise to me. Even before the debate over telecom growth story hitting a road block started, I was convinced that the dynamics in telecom industry has started to change and will worsen going forward, though I was bullish on telecom companies on two counts, which I still am but the problem is that none of these have shown signs that they will be a significant contributor to the top line. We are still few years away for these factors to starts contributing significantly to the top-line (refer page no 14).
The plunge in the stock price had to happen (reasons explained in the attached report), though it happened sooner than later. The govt. through 3G auctions has now realized the importance and potential of telecom sector w.r.t. revenue generation; helping it bringing the fiscal situation under control or finance its borrowing. The stocks might bounce back in near term due to this huge selloff witnessed recently, but in the medium to longer term, due to a complete structural change taking place in the industry, the likelihood of telecom becoming either a growth or defensive play is extremely remote, at-least from a three year perspective.
In my opinion, telecom story in India is no more about PE or EV/EBITDA, but one has to look beyond the numbers. The numbers/multiples might look attractive but even they cannot provide any cushion to the stock prices in the longer term (at-least for the next 3 years) due to a complete structural change, which the sector is witnessing and will continue to witness going forward.
Here, in the report, I look at 4 broad factors i.e. Government/Regulation, Expenditures, Newer Customer Acquisition, M&A/Consolidation, leading to this structural change within telecom industry, which in turn convinces me that Telecom Sector is not the sector to own, from a medium (1-2 years) or long term (3 years) perspective. I try and look at, what is the present scenario, and what these present scenarios can lead to in future. I am not all negative on Telecom story but the factors I am positive about are still few years away from yielding fruitful results.
I have tried to present a perspective, which is different, practical and makes sense (at-least to me) by putting myself in the customers and service provider’s shoes, on what holds for Telecom Industry in near future. I might be wrong, but hope you enjoy the perspective.