Reality check

The RBI is using risk weights as a policy instrument to target overheated sectors

It's ironical that the Reserve Bank of India (RBI) left out the only announcement of importance from the monetary policy statement, preferring instead to divulge it in a separate notification.

The real estate market and the stock market have both seen a sharp rise in asset prices, and the RBI feels that some of the exuberance has been irrational.

Hence, the decision to increase risk weights for lending to these sectors. Banks will now have to set aside a higher proportion of capital for these loans, which will increase cost of funds for lending to these sectors. That, in turn, will push up interest rates on these loans.

In short, by keeping the policy rate (the reverse repo rate) unchanged while increasing the risk weights on loans against real estate and shares, the RBI is trying to target those markets which are overheating, while at the same time ensuring that other sectors of the economy are not hurt.

The preference, in the circumstances, has been to use risk weights as a policy instrument, rather than the blunt one of a reverse repo hike.

While bank lending has indeed contributed to the market rally, many of the loans may not be explicitly taken for dabbling in the market""-personal loans, for instance, could easily be diverted to the market.

Further, with the kind of returns that punters are making from stocks these days, a rise of a few basis points in borrowing costs is of little importance.

More importantly, the current rally has been fuelled with foreign money, and that is impervious to a hike in local borrowing costs. No wonder the stock market shrugged off the news on Tuesday.

The impact on real estate market should be greater, given the large sizes of these loans. Nevertheless, since individual housing loans have been left out of the hike, it's unlikely that the housing market will be impacted seriously.

It's also true that the central bank has lost a good opportunity for a pre-emptive strike against overheating risks without disrupting the markets. That's because the bond market had already priced in a 25 bps reverse repo hike.

VSNL: Going Global

Videsh Sanchar Nigam Ltd's acquisition of Teleglobe International Holdings complements its takeover of Tyco Global Network (TGN), turning it into a global player. With Tyco, VSNL got an undersea cable link of 60,000 km. With the buyout of Teleglobe, a carrier, it now has access to network capacities in 240 countries.

Teleglobe, which has 1,400 wholesale customers and carries 13 billion minutes of voice traffic globally, can now use the TGN's network too. In terms of size, VSNL gets catapulted to a new league with revenues estimated at over Rs 10,000 crore in FY07.

Analysts believe that what VSNL gains most from this buyout is the fast-growing voice over internet protocol (VoIP) business which, although accounting for just 15 per cent of the global market currently, is growing at two to three times the pace of the voice market.

Last year, Teleglobe took over ITXC to emerge as the biggest carrier in the 30 billion minute VoIP space. VSNL's international internet base, which, at present, comprises just three routes out of India will also be strengthened""-it will get backbone Internet connectivity to 14 new countries.

Teleglobe has been posting losses on its revenues of $1billion and has approximately $63mn of debt on its books. At $239mn, VSNL has paid a fourth of the sales and shareholders of Teleglobe get $4.5 a share.

The deal may seem expensive given that the payback time is expected to be five years and there is some degree of overcapacity. At Rs 80, VSNL trades at 20 times expected FY07 earnings and has had a strong run in recent weeks, the market possibly anticipating some action.

Bharti Tele-Ventures

Bharti Tele-Ventures reported numbers that were ahead of market expectations, which led to a 2.9 per cent jump in the company's share price. This gives Bharti an absurdly high enterprise value of Rs 55,000 crore, which is 18 times its FY05 EBITDA.

True, Bharti continues to grow at a rapid pace, but last quarter's results show that the incremental growth is coming at a higher cost. Although Bharti's new circles turned EBITDA positive last quarter, the incremental EBITDA of its mobile business was just 33 per cent of its incremental revenues, compared to 59 per cent in the March quarter.

The EBITDA margin of the mobile business fell by 35 basis points sequentially, despite higher volumes (subscriber base was up 11.6 per cent) and a higher proportion of high-margin non-voice revenues.

According to the company, margins were impacted last quarter because of a faster rollout of its network (it added 1800 cell sites, about an 18 per cent q-o-q increase) and because of regulatory changes which hit revenues and margins alike.

Last quarter saw a reduction in roaming rates, as well as calls between inter-state circles such as Maharashtra and Mumbai being classified as local calls. Needless to say, since the impact of these measures was felt for only part of the June quarter, there could be a further hit in the September quarter, when the full impact will be felt.

What's more, the industry launched the Rs 200 pre-paid recharge coupon (30-day eligibility) to shore up volumes last quarter. While this is expected to drive growth going forward, average revenue per user would take a hit - analysts expect even some existing users to shift to the low-priced recharge coupon.

It's important to note that, nonetheless, that on a year-on-year basis, Bharti's EBITDA growth continues to be impressive at over 50 per cent. It's just that valuations seem ahead of fundamentals, but that's more because of the lack of any other play on the Indian telecom story.

With contributions from Mobis Philipose and Shobhana Subramanian