A double whammy forced the collapse of the telecom stocks. First was the Telecom Regulatory Authority of India (TRAI) giving clear indications of its intent to make the customers pay for as much as they speak. The second hit was the announcement of yet another price war in the sector with Reliance Com dropping all its call charges to as low as 50 paise per minute.
However, the first to sound the drums of war was neither RCom, nor even Airtel, which had cut its rates to 50 paise last month, restricted to calls within its own network, the culprit was Tata Teleservices which already had a per-second billing tariff plan running - this was through Tata DoCoMo, a GSM service.
RCom move may well shave off as much as 10 per cent from the operating profits of the other companies in the sector.
TRAI is saying that customers who speak for anything less than a minute should be charged only for that much time and not for the entire minute unlike the current practice. This TRAI tariff option is expected to create a 10-to-15 per cent revenue hole for the companies.
There was a mass scale run on the telecom companies’ stocks as result, which ensured a major fall in RCom stock (-11%), Bharti Airtel (-10%), Idea Cellular (-8.3%) and MTNL (-5.1%), on Tuesday.
While that is the story of the stocks, for investors in mutual funds, the effect was felt severely by the JM Telecom Sector Fund, which was launched in November, 2006 – it is the only fund devoted entirely to the communications sector. This fund’s total exposure is limited to just 5 stocks -- Bharti Airtel (39.06%), Reliance Communications (20.38%), Tulip Telecom (18.24%), Sterlite Technologies (13.34%) and Idea Cellular (8.07%).
Other telecom-heavy funds that have the highest exposure to the sector included Canara Robeco Infrastructure (14.64%) followed by JM Small & Mid-Cap and JM Large-Cap.
As far as mutual fund houses are concerned, it was Canara Robeco Mutual Fund that has the highest allocation to the sector at 11.40 per cent. Although Reliance Mutual Fund is not overweight on the sector (telecom companies comprise 2.65% of its assets), but even such a small percentage of assets devoted to one sector amounts to a whopping Rs 873.84 crore exposure.
Among the diversified equity funds, Bharti Airtel is the favourite pick amongst all the telecom stocks on the bourses - some Rs 4,609 crore worth of investments are riding on this stock. The next favourite pick is Reliance Communication where the investment made stands at Rs 625 crore.
Indian telecom biggies have been increasing the number of their subscribers hand over fist, but the average revenue per user is falling across the board and the current price war will shave off much more. The industry’s revenues are also likely to get stuck in a quagmire for the entire fiscal and perhaps more, hurting future prospects of the sector. Whatever, the outcome, one thing is certain and that is, new entrants as well as prospective entrants will find it well nigh impossible to get anywhere in the sector in the current situation.
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