Trading on policy changes is a high-risk, high-reward strategy. Get it right; there’s a big pay-off. Get it wrong, the losses are massive. This is why command economies go in tandem with very volatile stockmarkets. At the stroke of a pen, the government can change the fortunes of entire value-chains.
Since 1991 in fact, a large share of the returns in the Indian stock markets have revolved around guessing the timelines and extent of successive decontrol/delicensing plays across industries. Where timelines have been reasonable and investors have guessed right (auto, banking) super normal returns have been available. Where the guesses have gone wrong in refining, fertilisers, etc, the returns have been poor.
Telecom has seen a stop-start-stop-go stuttering trajectory. Every policy move has been accompanied with scams and/or litigation. The first decontrol in the mid-1990s, of mobile telephony, were profitable only to the few who bet on Himachal Futuristic and got out early. That was when Sukhram laid down a template for the later scams.
The second decontrol, in 2000, under Pramod Mahajan, was much more fruitful for investors in general. The move to a revenue-share model allowed mobile operators to start price wars that in turn, created a mass market. Since then, the industry has seen spectacular subscriber growth accompanied by a series of controversial policy moves.
Almost every policy decision has sparked litigation, accusations of favouritism and kickbacks. Think of the dual technology licensing, the interminable hold up with regard to 3G auctions, the spectrum allocation litigation, the controversies about using Chinese equipment for rollouts.
As of now, it seems that the Raja regime topped anything that has ever occurred in terms of scams. What the government does to mitigate the effects of the 2G scandal will make or break the industry’s fortunes over the next two-three years. Never mind how flawed 2G was, operators’ and analysts’ projections for rollout and revenues were made on the basis of that process. Changes must have an impact. Is there a downside to telecom stocks - not just operators but also infrastructure plays? Yes, of course. Is there an upside? Yes, if the issue is dealt with, quickly and with an eye to practicality, as well as abstract notions of “justice”. Is there insider information doing the rounds? Of course but it’s anybody’s guess whether that insider info is reliable and actionable. Fundamentally speaking, my feeling is that the downside is larger than the upside. There will be delays, and eventually, the 85-odd licensees will end up paying more – one doesn’t need to know the details of how this will happen.
However, the market has already factored in this downside to an extent. There could be a relief rally if policy decisions are earlier than anticipated and the cost to license-holders doesn’t escalate too much. Now, the market is betting on that optimistic prospect. Long positions in telcos may make short-term sense. I’d keep a stop loss at twice the high-low range of the most volatile session of the past year.
