Indian investors have several choices about investing in the Telecom Sector. But should they use the correction in the telecom sector stocks to jump in or bail out? Let us have a look at the players.
There is the behemoth of fixed line services - MTNL, whose stock has promised much and delivered little. BSNL is yet to be listed, but its performance leaves a lot to be desired. Both had misused their earlier monopoly by taking customers for granted and providing atrocious services.
Now they are trying to hang on to reducing market shares in a shrinking market. Both joined the wireless services bandwagon late. Efforts to provide new-age services like broadband (mostly ADSL) and IPTV have been marred by poor technology, slow implementation and lack of a service orientation.
Then there are the myriad wireless service providers, of whom Bharti Airtel has been the clear leader and Reliance Communications (RCom) the follower. This is one area where the Tatas have not done well at all. The other players are fighting to reach critical mass.
The 'hockey-stick' style growth in mobile telephony is showing signs of maturity. While subscriber growth continues to be good, ARPUs (Average Revenues per User) have been steadily falling. Strict government regulations on spectrum allocations, geographical operations, equipment purchase, and high licence fees leave very little room for flexibility in operations.
The service has become commoditised - with every one offering similar call plans and rates. The industry is very capital intensive with low sales to asset ratio. A Rupee needs to be spent for every Rupee earned. Ongoing maintenance and upgradation of technology is a constant drain on resources. Trying to generate new revenue sources through satellite TV services have further added to costs.
The last straw seems to be the entry of new overseas competitors like Virgin and DoCoMo. With per-second billing rates likely to become the industry standard, ARPUs will drop faster. This will benefit consumers but not the service providers. EPS will take an immediate hit, and the stocks are already being derated.
Lastly, there are the fringe players. Handset, network and switching equipment manufacturers are mostly MNCs, unlisted in India. The odd MRO-Tek has been around for years without the stock doing anything remarkable.
The value-added software providers space looks interesting, but has small players. Subex is making losses. OnMobile has good pedigree but the stock is expensive. Geodesic and Tanla seem to be doing well, but it is difficult to assess if their business models are sustainable and scalable.
So, the short answer to the question is: Yes. Why not invest in sectors where growth is visible and the future is less ambiguous?
(Many readers may not agree with my bearish views about the Telecom sector. I would like to hear your counter arguments.)