Telecom Stocks Outlook for the week – 06 to 09.09.2016 May fall more, seen under pressure for 1 month

Telecom Stocks Outlook for the week – 06 to 09.09.2016
May fall more, seen under pressure for 1 month

Stocks of telecom companies are seen down over the next week and the trend is expected to
continue for at least a month. Reliance Industries Ltd shook up the market on Thursday by
announcing the launch of its telecom venture Reliance Jio Infocomm Ltd, and its unprecedented tariff
plans. From Monday, Reliance Jio will offer its voice services for free and data packages starting at 19 rupees per day. All Reliance Jio services will be free till Dec 31.

The historical discourse metrics for the sector--voice, data, RPM (revenue per minute), ARPU
(average revenue per user), MOU (minutes of use), etc--these have become irrelevant. All bets are
off on how the industry financials shape up over the next couple of years. Top incumbents such as
Bharti Airtel Ltd and Idea Cellular Ltd will see some impact on their Jul-Sep and Oct-Dec numbers as the allure of the three-month unlimited free usage will shift users to Reliance Jio's network.

Assuming 5% impact on FY17/18 revenues, we expect 11.0% and 7.4% EBITDA (earnings before
interest, taxes, depreciation and amortisation) cut Bharti Airtel and Idea Cellular, respectively.
EBITDA margins for the incumbent tele companies could decline by 200-300 bps (basis points) in
FY18. Sector leader Bharti Airtel, arguably the best placed among existing carriers, will continue to be under pressure over the next couple of weeks.

The stock closed over 9% Thursday. However, it recovered yesterday ending up 2.6% at 318.90
rupees on the National Stock Exchange. Bharti saw some bounce back yesterday. The Sunil Mittalowned company, like its peers, announced cheaper data plans to counter Reliance Jio's tariffs. Its prepaid plans allowed customer to avail 1 GB data at 51 rupees per month for an upfront payment of 1,498 rupees, and the same quantum at 99 rupees per month for an upfront payment of 748 rupees.
Analysts, however, said its plans are not adequate to challenge those of Reliance Jio and that further
price cuts on voice and data plans were anticipated. Idea Cellular, the third largest operator, was
worst hit. The company lost over 33 bln rupees in market capitalisation as the stock plummeted
10.5% at 83.65 rupees Thursday on the National Stock Exchange. It may fall to 78 rupees on the
downside, while on the upside the stock can hit the 90-rupee mark. We expect Idea to report losses
at the PAT (profit after tax) level in FY2018 as well as FY2019.

Also, while Idea has improved its preparedness on the (spectrum) capacity front in the past couple of
quarters, we believe it needs to do a lot more. At some level, we believe Idea also needs to reassess
if it can continue with its pan-India ambitions without any equity infusion. Analysts expect Reliance
Communications Ltd to be the first casualty of the war for market share. The latest development
adds to the already-high uncertainty and challenges of valuing RCOM. Though it is expected to
rapidly lose a large chunk of customers to Reliance Jio, the company's share price may be least
affected. Investors holding Idea or Bharti should exit on the first bounce-back. Those having RCOM
should hold.