Indian Mobile Players- Waiting for another bonanza ahead

I have a fixation with the telecommunication sector and it has to be!!! as I started my equity research career as a telecom analyst. This sector still excites me and my area of attraction remains emerging markets in general and India in particular. India is seeing an enormous growth in mobile telephony with every month they are beating the last month addition which happened to be the historic highs.

With enough of ongoing party time and bonanza, this sector is waiting for another good news. After a slew of foreign interests from western and eastern part of the world including Europeans, Russians and Asia Pacific there is another region waiting to enter the still too attractive Indian mobile market. Flush with enough liquidity and buoyancy in their economies and strong balance sheet with enough of cash in hand with them they are all set to enter Indian mobile market. The economy which has been earning more than $300bn annually just because of the sustained increase in the price of black gold. Yes, I am talking about the great rich Middle East (telecom) players that include the likes of Emirates Telecommunications, MTC etc.

Indian mobile companies have always seen their valuation going up (with the key indicator being EV per subscriber) every time a foreign company bid up for them. When Russian giant Sistema (which holds the largest Russian mobile company ‘Mobile Telesystem’ in its portfolio) bid for Aircel 2 years ago it valued its subscriber at around $450 which has increased to around $650 recently when Malaysian telecom operator Telekom Malaysia bid for the same company. World’s largest mobile player Vodafone has taken a 10% stake in Bharti during October 2005 at EV/Subs of around $1000!!!

And for these rich Middle East companies sky is the limit as far as the valuation is concerned as they are gifted with deep pockets. If they want it they will grab it for sure…they have the money power. See the recent example of the acquisition of P&O by DP World. It bid and re bid at such a price that even the cash rich Temasek could not match it. During 2005, Emirates Telecommunication bid for Pakistan’s telecom incumbent at $2.6bn which was double to the bid amount of the second and third highest bidder China Mobile and Singapore Telecom. The Middle Eastern companies are shopping around hotels, ports, utilities etc.

They have shown tremendous interest in emerging markets in African and Asian countries and India is among their preferred list…has to be; with still 8% mobile penetration (when the world averages at around 30%) with burgeoning middle class of 300 million. They have expanded their operation out of their home markets to other countries in their region as well as in Africa. They are in shopping spree for the past 2-3 years and wish to continue the trend.

So in short, Indian mobile players…you are soon to be treated with another ring of valuation boost up.

Is correction in the UAE markets over???

Dubai Financial Market (DFM) and Abu Dhabi Securities Market (ADSM) have seen bouts of correction during 2006, wherein these markets have fallen by 16% and 15% YTD. Investors are busy in booking their profits they made in the 3 year one way rally of the indices…north that was.

Heavyweights have come out with their results and those stocks are down 10-20% since they did not meet the investors’ expectation…even after raising their bottomline by more than 100%!!! There was an irrational exuberance in the market but now we feel that the markets are taking their own set of correction and which is in fact healthy even.

If we compare the performance of GCC markets since the beginning of 2004, we find that after a serious correction the ADSM which was among the top performing markets in the GCC region has slipped to number 4th sharing the slot with Kuwait (which has seen stupendous rally since December 2005). Dubai however still holds the no. 1 slot thanks to its 186% and 120% rise during 2004 and 2005, follwed by Saudi Arabia and Qatar.

But now the question is…will the correction persist???

The UAE markets along with the GCC are categorized under emerging markets. So let us check the UAE markets with emerging market player like India.


UAE:
Price/ PAT (P/E): 20x
Interest Rates: 4.8%
Tax Rate: 0%
Price/PBT: 20x

India:
Price/ PAT (P/E): 18x
Interest Rates: 6.5%
Tax Rate: 25%
Price/PBT: 24x

The UAE combined market is trading at around 20x (ADSM at around 19x while DFM at around 21x) its trailing 1 year profit while Indian market is trading at 18x its trailing profit. But the comparison is not over. The benchmark interest rate in the UAE (pegged against the US interest rate) is at around 4.8% while the same is at around 6.5% in India. Higher the interest lower the P/E, as it reduces the value of company by increasing the WACC and also result in more interest outflow of leveraged companies. And also the UAE is a no tax zone and the companies here are not subjected to any tax. While the tax rate in India is at 30% plus surcharge. Even if we assume effective tax rate of 25%, and find the P/E, where earning should be before tax we find that the Indian market is trading at around 24x trailing earning before tax as against UAE’s 20x.

Agreed that UAE faces serious problems of:

-Lack of breadth and depth in the market.
-Lack of regulation
-Lack of transparency and corporate government
-More speculation activities than India

But if the recent state high level meetings and their conclusions are anything to go by, these would be a thing of past. Government is contemplating:

-Listing of DFM (which will make its functioning more transparent)
-Announcing modalities of corporate governance, among others.

Plus the UAE market is gifted by the immense liquidity which has exponentially increased during last 2-3 years, thanks to the stupendous increase in the oil prices and investing more of the petrodollars at home. It is estimated that the GCC markets have earned around $300bn during 2005 in oil which is expected to increase during the next 2 years thanks to the increasing oil prices. The UAE government has well utilized the petrodollars in diversifying its economy away from oil, which was absent in the previous booms.

Hence increasing oil price, economic diversification away from hydrocarbon and gaining foreign attention are some of the huge positives for the strong economy and thus the stock markets of the UAE going forward.

However going forward, I believe that the DFM would take some more correction from its current level of 850 before it starts its upward move. The downside is however limited to an extent of another 7-10%.

But I believe ADSM at 4450 should do well now onwards. It has got more depth and breadth that its peer DFM, though it suffers from liquidity. I expect it will go through a period of consolidation before moving upwards, however fall of another 2-3% cannot be ruled out before the upward movement starts.