Mumbai, July 12: Telecom stocks have been the major laggards in the stock market over the past year and a half. Markets have been factoring in lower profits for the firms as competition increases.
The fears seem to be coming true this quarter. Leading brokerage houses are projecting a lower profit for telecom companies in the first quarter, compared to the last year as well as the previous quarter.
Apart from rising competition, the large amounts paid by the firms for 3G and broadband spectrum are also expected to weigh in. Bharti Airtel seems to be a favourite stock in the sector, though some analysts also favour Idea. Many research houses are waiting for more clarity on the tower deal with GTL before they rate Reliance Communications.
Mumbai-based Motilal Oswal expects Q1 profits of telecom sector majors to be down 43.8 per cent versus the last year and 26.7 per cent versus Q4 of FY10.
The brokerage expects higher finance charges to account for the drop in profits. For Bharti Airtel, interest cost will rise due to the debt taken on for acquisition of Zain’s African business, notes Edelweiss.
Apart from core business concerns, the loans taken on for 3G and broadband spectrum have also stretched balance sheets, the broker adds.
Apart from high debt, the impact of increasing competition is also visible. The average revenue per user (ARPU) for the industry has been falling quarter after quarter, notes Angel Broking.
The figure is expected to fall further as operators offer schemes with billing rates of under one paisa/second. One positive for the sector, remarkably, could be the fact that the first quarter of FY11 saw fewer subscriber additions compared to the earlier three month period. This may indicate that companies are now paying more attention to subscriber quality, says Motilal Oswal.