Four years ago, a leading fund manager looked at telecom companies in India by comparing market capitalisation of the biggest company and comparing it with the population of that company. The idea being that everyone will eventually use a mobile phone and the potential of the market should ideally get captured in the market capitalisation of the biggest listed company of that country.
For example, Bharti Telecom, the biggest listed company in the telecom industry, had a market capitalisation of $18 billion in 2012 while MTN in Nigeria had a market capitalisation of $37 billion. Looking at the population of India and the growth rate of India, Bharti Airtel should ideally be valued at a much higher multiple – that was the logic of the fund manager. His logic was flawless.
Anybody who would have purchased Bharti Airtel at that time would have believed that the stock will give very high returns. The stock had already lost some 40 percent of its value and there investors in general felt that the macro situation of India was good to support growth which will easily get reflected in the telecom story.
The fund managers view was that India, when it comes to per-capita use of telephony had a very low number. At around $15.6, India had the lowest market cap per person when it came to telecom usage. He decided only to look at the leader in the pack so did not consider Idea Cellular while valuing this number. He wanted to compare other leading operators with the population. In this respect, China was high at $166 as China Mobile had a market capitalisation of $223 billion. “How can an Indian top company be valued at such a low market cap? The company has to grow and catch up with the numbers of other developing companies”, he said.
He was right. But over the last four years, the global macro situation has not been great. All leading companies in developing countries have not seen any growth in their telecom business. Most companies have lost in terms of market capitalisation except for Indonesia. Almost every country is seeing some type of disruption in the telecom market.
In the Indian market, it is Reliance Jio [Reliance Jio is a wholly owned subsidiary of Reliance Industries, the owners of Network 18 - the publishers of Forbes India]. Four years ago, nobody really understood how this would work out. But to be fair to the fund manager, he had changed his mind about Bharti Airtel in the next one year when it was clear that Reliance was planning to be a serious player in the telecom business. “Maybe I was wrong about a particular company. But what matters is the benefit to the consumers. The fact still remains that in terms of valuation, Indian companies are still valued at a discount when compared to their global counterparts.”
Telecom companies in the developed market are valued at a premium. Australia with a population of 2 crore has a very limited market size. Its biggest telecom company Telstra is valued at $78 billion. The per capita market cap is $3452.
Will Indian companies ever get that kind of valuation? Looks very unlikely till the consolidation gets over and a winner comes out.
The thoughts and opinions shared here are of the author.
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