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Tuesday, November 16, 2010

Should you invest in Telecom Sector stocks?

Regular readers of this blog may be aware of my bearish view about the telecom sector. I had written a post back in Oct ‘09, advising investors to switch out of telecom sector stocks. There were many reasons for such advice: commoditised services, strong competition from overseas players, regular capital expenditure, astronomical fees for new licences, falling ARPU (average revenues per user).

Adding to the litany of woes for the sector is the 2G licence scam that has cost the Telecom Minister his job. The government is under severe pressure from the opposition to act due to several recent scams involving massive sums of money. Any action may lead to fines and penalties on telecom service operators who either obtained their 2G licences through dubious means, or paid too little for it, or sold their licences to others at huge profits.

Does that mean all the stocks in the sector should be shunned? Given below are ten telecom sector stock charts – five of them are telecom service providers and the other five provide software services and network hardware. All the charts have a horizontal line representing the closing price of the stock on Oct 6 ‘09 (the day I wrote my bearish post on the telecom sector).

MTNL

MTNL

This PSU, which had a monopoly on fixed line services in Delhi and Mumbai, has fallen on hard times. It slipped into a loss last year and has dropped below the falling 200 day EMA. Both the RSI and slow stochastic are in oversold zones. Use any rises to sell.

Bharti Airtel

BhartiAirtel

Bharti Airtel is the jewel among the telecom pack, but has lost quite a bit of its lustre. Many investors are still bullish about the stock. However, barring a few days in Sep ‘10, the stock has remained below its Oct 6 ‘09 closing level of 359. The Zain acquisition in Africa is yet to add to the bottom line. The recent up move has ended with a head-and-shoulders bearish pattern with a neckline at 320. A pullback to the neckline may be an opportunity to sell.

Reliance Communications

RelComm

What can I say about the Reliance Communications stock chart? The Oct 6 ‘09 closing level of 269 seems a distant dream. Losses in three of the past four quarters. If you are holding this stock, ask yourself: Why?

Idea Cellular

IdeaCellular

What have we here? A telecom services company that is trading higher than its Oct 6 ‘09 price! Hand it to the management acumen of the Birlas and the innovative ad-campaign featuring the ‘baby B’  for turning the fortunes around at Idea Cellular. Steadily gaining market share, this stock is a good contrarian play – provided you wish to invest in the telecom sector.

Tata Teleservices (Mah.)

TataTele

Despite the Tata name and their best efforts, the bottom line is a sea of red. The stock has remained an underperformer. Sporadic moves above the falling 200 day EMA have been used as selling opportunities. Avoid.

Subex

Subex

The Subex stock – a favourite of investors in the previous bull market – got hammered during the economic downturn and slipped into the red. The telecom fraud management software provider has since turned around, and is forming a bullish cup-and-handle continuation pattern. The break out above the Oct 6 ‘09 closing price has been on strong volumes. The dip (forming the ‘handle’) can be used to add. The huge debt burden makes this a high-risk play.

OnMobile Global

OnMobile

Despite its strong pedigree, the OnMobile stock has remained expensive and an underperformer. The value-added software niche has promise that hasn’t yet been turned into performance. One of its big clients – Vodafone – is facing a huge income tax liability. Even now, it is trading at an expensive TTM P/E of 25. Only very patient long-term investors should think about entering this stock.

Geodesic

Geodesic

The Geodesic stock spent the better part of the past 13 months below the Oct 6 ‘09 closing price. Of late, it has moved up sharply to regain most of its lost ground. The stock appears fundamentally sound, but I have neither been able to figure out its business model nor the reason for its considerable unsecured loans. As the old saying in the market goes: if in doubt, stay out.

Tanla Solutions

Tanla

I really have no idea what they do, or who they do it to. Four straight quarters of losses and a chart that looks like a roller blader going down an icy road is enough to convince me not to give a second look to Tanla Solutions.

MRO-Tek

MROTek

This network hardware provider has been around for long, but achieved little. I hate to admit it, but I did own this stock for several months during the previous bull market and was fortunate to exit with a tidy profit. Only good for medium-term trading. Not an investment candidate.

Related Post

Should Indian investors switch out of Telecom Sector stocks?

5 comments:

Jitesh said...

Really Nice Analysis -- Simple and straight forward...... More reasons to visit your blog... On behalf of all, Thank You for your efforts sir...

Subhankar said...

Appreciate the kind words, Jitesh.

shailendra said...

Thanks Subhankarji !

May I request you to post your views on Tech Mahindra prospects. W.r.t impact due to different events going around this - BT planning to move out, planned merger with Mahindra Satyam.

Some articles say that Tech Mahindra is probably keeping Mahindra Satyam's price down so as to get benefit during the merger. But, how to verify ! And, another aspect is that merger may go otherway round and that Satyam is recently beaten down due to slow recovery/results [though under different management]. Please advise.

Subhankar said...

BT was a major client and partner of Tech Mahindra. The parting will affect revenues and credibility. The Satyam merger may increase size, but unlikely to increase performance. Mergers tend to be value-destructive in the near term.

Technically, the stock has been in a downtrend since hitting a peak in Jan '10. Avoid/switch.

shailendra said...

Thanks Subhankarji for your comments!