Watch out before investing in 2G related stocks: Experts

Even as many stocks have been hammered and are quoting at historically low valuations, experts advice caution due to lack of clarity and implication on earnings.

With the 2G controversy becoming more intensive, market experts advise caution before investing in companies that are seen associated with the event, since they believe there could be more surprises as the investigations progress.

Meanwhile, these companies together have lost about Rs 20,000 crore (Rs 200 billion) in market value since the arrest of former telecom minister, A Raja, leading to historically low valuations.

So, as an investor, what are the options and what experts advise?

"Let us not get confused. Wherever there is something improper or fishy, one should exit those stocks, irrespective of valuations or fundamentals of the company," says S P Tulsian, an investment expert.

Analysts are of the view that even the current prices may not sustain if the companies are proved guilty.

But, for those still looking with a strong urge to buy into such companies, Deven Choksey, MD of K R Choksey, believes: "Be sure of management credential, business fundamentals and critically analyse the potential impact. Looking at the valuations in isolation will not help."

Anant Raj Industries

Among those hit by the telecom controversy since the beginning of February, Anant Raj has fallen the most.

Despite a clarification from the company that its promoters or directors do not have any links or dealings with telecom-related companies, it continues to trade near its 52-week low of Rs 66.

While its balance sheet is quite strong (Debt-equity ratio of 0.25), any unfavourable outcome of the probe could affect the stock. On the operational front, the company had a good December quarter, with revenues growing 34 per cent to Rs 121 crore (Rs 1.21 billion).

The stock is available at substantial discount to its NAV (Rs 150-Rs 180), and analysts are not overtly worried.

DB Realty (DBRL)

While investigations are underway, the 2G-related issue could indirectly affect the real estate business, believe analysts at Anand Rathi.

The company, which has to pay over Rs 800 crore (Rs 8 billion) for the Bandra Government Colony project in Mumbai, is in talks with private equity players to offload a part of its stake (20 per cent for about Rs 1,200 crore) in the project.

While its low debt and cash flows should help it execute existing projects (20 million square feet) to an extent, any delay in finalising partners could hit the roughly 40 million sq ft of forthcoming projects in Mumbai and Pune.

Though analysts believe there is a steep discount (over 60 per cent) to DBRL's fair value and the company is not as leveraged as others, investors are advised to wait till the dust settles.

Reliance Communications

The RCom stock has been under pressure due to investigations on cross holdings above the 10 per cent limit in Swan Telecom.

The company, however, says it has not violated norms on cross holdings and held 9.9 per cent when Swan had applied for a licence and reduced its holding to nil after the licence was issued.

While regulatory issues may lead to a penalty (in the worst-case scenario), RCom will also need to improve its operational performance and reduce mounting debt. In a seasonally strong quarter, the company recorded its 15th straight quarter of a fall in minutes of usage.

Analysts believe the two key areas it has to focus on are reduction of debt through sale of assets (both domestic and global) and ramping up of its 3G services.

Though valuations have turned attractive, a majority of analysts have a 'sell' rating due to the 2G issue.

Reliance Infrastructure

While there are no direct or financial implications for Reliance Infrastructure (RInfra) and its associate Reliance Power, their stocks took a beating due to the negative news related to group companies.

However, thanks to the recent buyback announcement (Rs 1,000 crore; up to Rs 725 per share), RInfra's stock has recovered most of its losses.

Most analysts are cautiously optimistic on RInfra with target price ranging Rs 1,000-1,100.

Prakash Gaurav Goel of ICICI Securities notes in his recent report: "Though our fair value implies an upside of 65 per cent in base case scenario, we are concerned about the negative news flow and believe that sentiment can be an overhang in the near term."

For Reliance Power, too, while analysts value its stock at about Rs 140-160, they believe it could remain under pressure till clarity emerges.

They also advise monitoring the progress of its various power projects.

Sun TV

The Sun TV stock has been in the spotlight due to the investigation on investments by DB Realty of over Rs 200 crore (Rs 2 billion) in Kalaignar TV.

The management of the company, however, has denied that the promoter (Kalanithi Maran) or the company has any shareholding in Kalaignar TV.

At the operational level, the company had a good December quarter and raised ad rates for its Tamil and Telugu channel bouquet by 8-43 per cent (effective April 1, 2011) which should boost revenue growth in 2011-12.

Analysts at Edelweiss Research believe the company's near-monopolistic market standing (in high growth regional markets) will enable it to outperform peers.

While analysts value the stock in excess of Rs 500, the key risk continues to be the ongoing probe.

Unitech

Unitech is under investigation in connection with the allotment of licences and the subsequent sale of its majority stake to Telenor.

The pledging of 65 per cent of promoter stake in the company is also proving to be an overhang for the stock.

While the telecom exposure might not affect the core realty operations much (16 per cent of Unitech's valuation attributed to the telecom stake), its debt too has come down to manageable levels with debt-equity ratio of 0.45 times from 1.7 times in 2008-09.

However, headwinds in the form of hardening of interest rates and tougher lending norms could hit realty demand and keep the stock price under check even as analysts peg its SOTP value at Rs 50-80.