Is a Telecom Sector Revival Round the Corner?

Apurva Sheth

Telecom sector is buzzing the last few days. Smaller players in the sector were already facing heat after Reliance Jio's entry in to this space. As the competition intensified the screams of consolidation grew louder.

Finally, we are seeing some progress in this direction. Idea and Vodafone have initiated talks for a cashless merger agreement. If the deal goes through, the combined entity could become the largest Indian Telecom company.

Now whether the deal materialises - and if it does, then in what form - remains to be seen. But one thing is for sure: The merger talks have revived hopes of consolidation in the telecom sector. Analysts and financial media have already given a thumbs up to the deal and are now optimistic about telecom stocks future.

But is the picture rosy for all the stocks in the sector?

Not really.

Let's look at the charts of top five listed service providers in the telecom sector and see what they are doing.

Before I begin, I want you to keep this market cycle model in mind. This will give you a broad framework within which stock prices normally move.

Stocks move up and down in predictable cycles. These cycles have a proper structure. A cycle from one bottom to another bottom can be divided into phases.

A stock goes through this cycle without fail. This is true in financial markets across the world.

Four Phases in A Cycle

Most stocks (and even other financial instruments) go through these four phases repeatedly:

  • Accumulation - Stock consolidates in a range after a prolonged downtrend. Value investors enter in the stock.

  • Uptrend - Stock crosses the range resistance. A higher-top/higher-bottom cycle is clearly visible on the charts.

  • Distribution - Common investors start to participate in the stock. Smart investors start to exit. Every subsequent high becomes more difficult.

  • Downtrend - Lack of substantial up moves unnerves participants. They begin to exit the stock, leading to a vicious cycle of panic and downtrend.

Now let's look at the chart of Idea Cellular, which is in the limelight.

Idea Cellular: Out of the Woods
Idea Cellular: Out of the Woods 

Idea Cellular topped out in October 2007 at a price of 161 and witnessed a sharp fall. It eventually bottomed out at a price of 34 after a year. This was a drop of 78% in twelve months.

The stock consolidated for a while and started to move up. The uptrend between 2009 and 2012 was rough. But it still managed to more than double from the all-time low of 34 during this period. Finally, it topped out at 188 in October 2013.

The stock entered into a distribution phase immediately after this. It traded sideways for more than a year. It even spiked to a new high of 204 in April 2015. But the bulls couldn't sustain the stock any longer. Idea Cellular then entered a downward spiral and lost two-thirds of its value in twenty months. It hit a low of 66 in November 2016.

It consolidated for two months after hitting the lows and has ended the downtrend. The stock is up 50% in the month of January. The bulk of these gains came in the last two days when the company confirmed the news of merger.

Heavy volumes after a downtrend generally indicates a trend reversal. It seems that Idea Cellular is out of the woods and a higher-top and higher-bottom cycle would confirm this.

But what about other stocks?

Bharti Airtel: Stuck in a Range
Bharti Airtel: Stuck in a Range 

Bharti Airtel rallied extraordinarily from a low of Rs 10 in January 2003 to a high of 592 in October 2007. That's a whooping rally, isn't it?

The stock gave up almost 60% of these gains as it touched a low of 240 in October 2008. However, in the bigger scheme of things, even this fall looks a drop in the ocean compared to the huge rally between 2003 and 2008.

Now it seems like the stock is still consolidating these gains. It's been trading in a broad range of 250 and 450 for the last eight years. It hasn't had any meaningful trend, just sideways movement over the years.

I consider the recent upswing a flash in the pan rather than a game changer for Bharti Airtel.

Reliance Communication: No Light at The End of Tunnel
Reliance Communication: No Light at The End of Tunnel 

Reliance Communications hit an all-time high of 844 in January 2008. The stock crumbled with the rest of the high beta stocks and hit a low of 131 by March 2009. It almost doubled in less than three months but the worst was yet to come.

The downtrend continued for three years as the stock bottomed out in August 2012 at 46. The stock then began a rocky ride up. It rallied almost four times till September 2013. It hit a high of 164 when news of a truce between the Ambani brothers and a tie-up between Reliance and Reliance Communications were doing the rounds.

However, nothing concrete materialised and the stock was staring into a deep black tunnel once again. It found support near 46 levels once again in August 2015 and multiple times in 2016. But it eventually broke below this level decisively in December 2016. The stock recently hit an all-time low of Rs 30 but was up by 10% this Monday.

A 10% rally may impress the punters, but not me. The stock needs to cross the barrier of 46, which, looking at the charts, seems like a Sisyphean task.

MTNL: Mera Telephone Nahi Lagta
MTNL: Mera Telephone Nahi Lagta 

I still remember the day when we got our landline connection from MTNL. My grandfather distributed sweets in the neighbourhood. It was such a matter of pride having a telephone connection at your home in the 90's.

Unfortunately, MTNL shareholders do not share the same pride. The stock has been in a downtrend ever since I started looking at charts.

The stock hit a low of 9.75 in August 2013 but bounced back to 39 by June 2014. It has been consolidating in a range of 14 and 24 over the last two years and seems like there is very little hope for a turnaround unless it crosses 24. Until then, keep dialing...

Tata Tele: Dismal Charts
MTNL: Mera Telephone Nahi Lagta 

It's the same story for Tata Teleservices. The stock is in a downtrend after topping out at 57 in January 2008.

It spiked on Monday, but that is meaningless given the stock's dismal charts. Avoiding it would be the best thing to do.

So you see, most telecom stocks - except Idea - are trading sideways or are in a downtrend. So the next time you hear about a revival in a beaten down sector, you can use the market cycle model to figure out whether there is any substance to it.

Some stocks, like Idea, will fit perfectly into the model and move in a rhythmic fashion...from one phase to another. Keep these stocks on your radar. On the other hand, some stocks may never see the light of the day after going through a downtrend. Avoid these stocks.

All you have to do is look at the charts and let them to talk to you.

Will the Idea-Vodafone merger revive hopes for other stocks in the telecom space? Share your views in the Club or share your comments here.

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