Does it make sense to buy telecom stocks now? Ajay Bagga answers

What is currently leading the market because we are getting very confusing cues?
Yes, and that happens when global markets are at lifetime highs. We are an outperforming market, if you see year to date India is up about 13% while MSCI emerging markets is down about 3% and that is largely because of the Chinese underperformance. China has a huge portion in the MSCI emerging markets. So clearly India has been an outperformer more on a hope rally that earnings are recovering. It is very difficult to compare as you cannot do year-on-year comparisons because it was a total lockdown and you cannot do quarter-on-quarter comparisons because this quarter was a bigger lockdown than the last quarter of the last fiscal or the first quarter of the calendar year.

So it is difficult to compare but as against expectations, the Nifty earnings have been underperforming in a majority of cases and the trends which are a little worrisome are that the higher retail NPAs. Even quality banks like HDFC Bank made bigger provisions and reported higher NPAs. So the market is worried whether that will flow through. As the weaker hands start reporting over the next couple of weeks, we will see how much more of an impact it has been.

We saw some housing finance companies reporting pretty bad numbers. We saw some rural finance companies reporting pretty bad numbers. One pharma major reporting lower US revenues led to a rerating downwards on pharma. Those are the worrisome issues but I would say the market will be determined by global trends and global trends are upwards. Global economic recovery is strong. The S&P 500 is on course to deliver about 86% earnings growth this year and that is what will carry the global markets. We will be beneficiaries. So far we have been outperformers. We will maintain our outperformance vis-à-vis the emerging markets.

Which sectors do you think are going to be most vulnerable to cost inflation?
About 53% of the Nifty earnings are directly impacted by commodity costs in a big way and IT is seeing a big wage increase because of attrition and because of expansion. It is not going away in a rush. So nearly 50% of the Nifty earnings will get impacted. The IT part gets impacted by the wage spiral that we are seeing and the push by customers to reduce costs and we have seen margins under pressure.

The good thing is that the cost cut measures that have been taken over the last one year, has allowed companies to manage the costs. For example, even though Colgate was under input cost pressures, they managed to deliver a very sharp rise on the profit front by taking these cost outs. So Indian companies have taken a deep look at their cost base and that will happen. But as a macro trend, inflation is there at least for the next three to four months. Then we will see a little bit of cooling off in India. It is not that much of a bug globally.

In the case of India, given the position of oil, there is very little space to hide, that itself becomes such a huge cost push inflation factor which negates any other thing. Fiscal and monetary stimulus are inherently inflationary. So, it is very difficult to foresee inflation coming down and I am hoping RBI will also agree with that that there is very little monetary policy and what hiking rates can do in such a cost push environment.

One has to wait for the global cost pressures to get taken out or wait for the base impact to come in next year. That is when you will get some relief. Given that, through these cost outs, companies will deliver on the bottom line. There will be an expansion in volumes in the second half of the year.

The mobility indicators are already back to the March quarter numbers so we have had a dip in this June quarter but we are expecting a stronger macro in this quarter and which will accelerate as the festival season starts, it will accelerate going into the winters unless there is a very big third wave, we are really not expecting that looking at the UK scenario. We are expecting a mild third wave, but let’s keep our fingers crossed.

Do you think that the pricing power is returning to the telecom sector, especially ?
If you look at the post paid part, that is 5% of the customers and 20% of revenues and within that, a very small portion got impacted. In prepaid, it is a very low level, starting package which has been removed. Telecom players have really flattered to deceive is what I would say. For multiple years, they have not really delivered. We thought over the last one year with the AGR issue finally coming to a closure, there is some way to value these companies.

Secondly, a few months back, Sunil Mittal had come out and said that Airtel was looking at an ARPU of Rs 300 and that was music to the market’s ears. But we have seen the stocks underperforming. ARPUs are staying in the Rs 130-140 range. The other disconcerting factor is if you look at the customer growth numbers, Vodafone and Bharti both have lost a chunk of customers as per yesterday’s reports.

I would say there are very few drivers really in place. We do not see some kind of an agreement or some kind of managerial will to take the bitter pill and get rid of non-profitable customers and increase the ARPUs from profitable customers. All of us are willing to pay higher for better services. Today all of us are using internet calls to communicate because the normal calls just do not get completed.

Most customers are willing to pay more but it is a fight down to destruction amongst the three players. We are really not seeing the ARPUs increasing so right now I am not very sanguine. Bharti will touch Rs 600 and come back again because those drivers for the sector are really lacking.

There is no big surge of value added services. There is no revenue in voice anymore. We had thought VAS will create some services and revenue pools but even those have not really taken off. Overall, they are not generating much from that customer and I would say it is better to upgrade to premiumise service and offer a more reliable service to higher paying customers than to just go for these millions of customers and not deliver anything either to the shareholder or to the customer.