These stocks are going up on the hope that high 3G auction prices will prevent players from continuing their cutthroat tariff wars and that the recent regulatory recommendations will be toned down

Telecom stocks have been rising for the past few sessions and today they simply flared up. At the time of writing this, Bharti was trading at Rs303, up 8%, Idea was up 11% at Rs65 and RCom was up 2% at Rs192. What is driving all this buying?

What is driving telecom stocks is the hope that high 3G auction prices will prevent incumbents from engaging in further highly competitive tariff wars and that the recent recommendations of the Telecom Regulatory Authority of India (TRAI) will be toned down.

In fact, using this logic, a host of brokerages have been pushing telecom stocks aggressively to institutional investors over the past few days. Credit Suisse (CS) came out with a report today in which it upgraded its EPS estimate for Idea for FY11 by 100%! The report goes out on a limb to assume a stable competitive environment, which will lead to steady revenue per minute. It says, “Incumbents have positively surprised us on mobile metrics over the past two quarters, and we have come across instances of tariff increase." CS has a price target of Rs360 for Bharti and Rs75 for Idea. Religare too came out with a report today in which it assumes that a number of Idea\'s loss-making circles will turn profitable in FY11.

But an even bigger assumption in the market is that since the recent TRAI recommendations are now with the Cabinet, they will be overturned or at least watered down. TRAI has recommended that 2G auctions should be along the lines of the recent 3G auctions and that a one-time fee should be paid for spectrum between 6.2MHz to 8MHz. This means existing telecom players such as Bharti and Vodafone will have to shell out large sums.

In Bharti\'s case, market players are also hoping that Bharti will unlock value in its tower business Indus in which it holds 42% stake (like Reliance Communications recently did) and bring down its debt (which it has incurred for its Zain buy). Besides, it had got a boost from the Life Insurance Corporation of India recently upping its stake in the company to 5%. Yesterday when Bharti closed at Rs281, traders were anticipating that the stock would face its first resistance at Rs300, which it has cleared in a day. The next level to watch out for is Rs330. Two important red flags, especially if you are a short-term trader. One, a casual observation of Bharti\'s chart shows that these kind of sharp up-moves have usually been followed by sharp pullbacks. Two, serious buyers, such as financial institutions do not generally engage in undisciplined trades, i.e., they will not bid up a stock by 10% in a day. Therefore it is safe to assume that the \'serious\' buying has already quietly happened over a few sessions, earlier in the week and today\'s gain is more speculative in nature.