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Thursday, January 19, 2012

Analyzing telecom stocks? Keep these pointers in mind

Telecom is a sector which is technically complex(to understand), and full of regulatory quicksand. But for those brave investors willing to risk investing in these stocks, there is still money to be made given the digital divide bridging agenda of the Central Government. So without much ado, here are my pointers
  1. Effective Subscriber base:-Thanks to the lifetime prepaid validity schemes, dual sim phones and other aspects, many subscribers have multiple SIMs, many of which are not in use. So before crediting an operator for its subscriber growth, be careful about the effective subscriber base, as opposed to absolute connections. For example, out of the total  884.37 Million subscribers,  635.39 Million were active on the date of Peak VLR for the month of November 2011 viz 72%.. TRAI gives the overall % broken down by operator and circle, which ranges from 25% for Etisalat to 83% for Vodafone(http://www.trai.gov.in/WriteReadData/trai/upload/PressReleases/859/Press_Release_Nov-11.pdf). Do read this to get the market power in perspective.
  2. Teledensity:-While TRAI and others calculate this simplistically as the subscriber base divided by total population, this does NOT consider the effective subscribers. Hence, the actual teledensity for India's 1.2bn population, is closer to 50%(IF we can assume that kids should not use mobile phones(!), then the figure would be higher). Before using this figure anywhere, be aware of the key assumptions behind it.
  3. Adjusted Gross Revenue:-The statutory license fee is calculated on a different revenue base than adopted for financial reporting(the difference being excluding revenue from certain rural areas/essential services). If AGR is significantly different from Gross Revenue, it could mean fudging the records of anyone/both, as was the accusation by Kotak against Reliance Communications about 2yrs ago.
  4. Minutes of Usage-see outgoing only!:-While reading the TRAI quarterly statistics for June-Sep quarter here(http://www.trai.gov.in/WriteReadData/trai/upload/PressReleases/860/Quarterly-Press-Release-final.pdf), it struck me that even TRAI adds up both incoming and outgoing MOU for counting the total-though it does split them up. Given that incoming calls are generally free in India(barring roaming), the better metric for investors would be outgoing calls MOU(or even better, revenue earning MOU since not all minutes may be charged). 
  5. Understand the value chain:-There are many people vying for the telecom rupee, such as handset makers, VAS providers like Onmobile, patent owners like Qualcomm, service providers like IBM, DTH providers like Tata Sky/Dish TV and so on. Take a big picture look at the profits and revenues across the value chain-I know that needs lots of digging into data and consultancy reports, but the results would astound you as they did me. For example, I did not know that VAS owners get on an average only around 30%-50% of their end user payment, while the operator takes the rest! Also, telecom equipment is the next boom independent of what happens in the voice/data market. While plugging in variables for that valuation/DCF model, such insights are must.
  6. Rerating as becoming responsible by compulsion! TRAI has significantly revamped the regulations on customer service/experience using measures like MNP/stopping spam etc, and recently announced that telecom operators must measure and reduce their carbon footprint by 2020, and improve their energy efficiency. These measures would earn the stocks brownie points when implemented, hopefully aiding their inclusion on certain indices, and thereby broaden the addressable investor base. Of course, this is a quite long term aspect
  7. EV/subscriber not comparable:-While some lazy analysts may compare other emerging market telcos, be aware that the data revenues of Indian telecos are quite low, and also the business model difference(more outsourcing). So, understand the main revenue split/growth drivers of the comparables before resorting to such peer comps. Of course, this warning applies to all companies not only telecom, but the deceptive simplicity of telecom may seduce investors to compare apples and oranges. 
 The above was more a general overview than any stocks specific analysis. Depending on response, I'll delve into some specific stocks later

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