Reliance Communications (RCom) is in a problem with its alleged involvement in the 2G spectrum scam. RCom is already undervalued but this latest problem can put pressure on the stock. This past week saw 10% drop in RCom’s stock, and based on new facts that came to light in last 2-3 days, we have reduced our holding in RCom. Its possible that RCom can fall another 10% from current levels to around Rs 130-135.
Thankfully, many other good stocks have also fallen 10% in the week, giving us an ideal shifting opportunity. Our top picks to make the shift are: BHEL and Tata Motors at current prices. Both these stocks are likely to continue delivering good profits and have no regulatory overhangs like in RCom. Once the air around RCom clears, then we will reconsider entering this stock.
RCom Q2 FY11 Results are positive, and the stock is buy at current price of 170 if you have time frame of more than 1 year. The stock is a long term holding because telecom is closely linked to Indian consumer growth story. By Jan 2011, some brokerage reports will upgrade RCom, and we can see a rally. 13 Nov 2010: Reliance Comm – Results Press Release
RCom is looking to sell up to 26% stake to reduce debt. Its plan to sell its towers business to India’s GTL Infra, that could have reduced debt by 50%, fell apart in September. But no worries, it is evident that both RCom and Bharti are increasing focus on 3G/value-added offerings to improve margins, and their staying power is beyond doubt — both companies are going to roll out 3G wireless services to grow the high-margin mobile data business rather than depending on revenues from low-margin voice calls. The large number of youth in India will surely be good consumers of such higher-end services.
CMP is 170. Our 1 year target for RCom is 270, and 5 year target is 600+. And 200 can come rapidly, as soon as an update on tower sale or new equity infusion comes up.
Bharti must win the upcoming 3G Auction. It must be the top winner and company has the resources to make it happen. This is critical to launch the full arsenal of high value services. Many investors are losing faith in Bharti and Reliance Communications, but we differ. There’s no way India can grow without these two companies as the communication pillars. Once the “sector re-rating” dust settles, we will see both these companies have brought in new revenue streams to support the EPS. Continue reading Bharti Must Win 3G Auction