Among the telecom scam-tainted companies, analysts advise investors to exit the realty ones.
Stocks embroiled in the telecom spectrum scam have lost between five and 13 per cent over the past week. And, down 45-78 per cent since November 2010, to levels that may look attractive from a value perspective. Analysts, however, say investors shouldn’t get lured into buying these stocks merely on the basis of their perceived ‘value’. A selective approach, though, could yield decent results.
The research head of a leading brokerage says the impact of the scam will be more on the realty companies (Unitech, D B Realty) than on retail or subscriber-driven ‘utility’ ones scuh as Reliance Communications (RCom) “From a value perspective, these businesses (like RCom) are sound. You cannot replicate the network, systems or the subscriber base they have built. There is value in the company and management issues are well discounted.”
Analysts believe investors should exit from the realty companies not just due to the scam overhang but also the worsening credit and interest rate situation. “Loans restructured in 2008-09 will come up for renewal and lenders will either increase rates or ask for higher collaterals to compensate for increased risk,” says one.
DB REALTY
Analysts are worried about the ability of the company to raise loans and bring in partners to fund projects. The expected increase in interest rate and higher cost of debt will compound problems. A realty analyst says the company will be able to raise debt but this will come with a higher interest bill, which may increase costs and delay execution. Even as two co-promoters were arrested on account of the telecom scam and five directors quit the company board, DB maintains it has a strong team that will ensure projects are completed on time. While the stock is available at a discount of 60 per cent of its fair value and net debt of about Rs 230 crore looks manageable, concerns on raising of fresh funds, a weakening Mumbai real estate market and execution delays could hamper the company’s planned 40 million sq ft of forthcoming projects. Analysts say investors should use any upward move to exit this stock and not take fresh positions due to cheap valuations.
UNITECH
While the company has clarified that its core realty business will not be impacted by recent regulatory action against its telecom venture, the stock is likely to be under pressure till the dust settles. Edelweiss’ analysts, in a recent report, said among significant business risks are a longer working capital cycle on the back of a slower pace of execution. In addition, the pledging of a significant portion (68 per cent) of promoter holding in the company will be an overhang for the stock. Most analysts have attributed zero value to the telecom investments and believe the worst case scenario could involve writing these off. While the stock is trading at a significant discount (40-50 per cent) to its net asset values and is attractive from a valuation perspective, uncertainties and unfavourable macro environment make it a high risk bet.
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RELIANCE COM
While RCom or other group companies were not been named in the recent asset seizure plans by regulatory authorities, the scrip is down five per cent in the past week. Earlier, the company had clarified that the arrest of executives at its subsidiary, Reliance Telecom, would not impact operations. HSBC analysts believe the negatives weighing on the stock are on account of its balance sheet, the scam probe and poor operational performance. They believe the company would have a tough time unlocking the value of its tower assets in this market. While it managed to refinance its 3G spectrum debt through a China Development Bank loan, which is a positive, leverage remains high. HSBC estimates the company might end by paying a one-time start-up spectrum fee of $335 million (Rs 1,500 crore) as a fallout of the spectrum probe. While the stock is expected to be under pressure due to poor March quarter numbers, analysts have pegged targets in the range of Rs 100-120.
