Until recently, one of the rituals of life in Brazil was waiting for the day when the men from
would lay a line and connect you, at long last, to the rest of the world. The experience of a couple living in Rio who welcomed the abrupt interruption of a dinner party to allow the installation of a phone line -- four years in the coming -- was not atypical. Dinner parties, after all, are a common sort of thing. Getting a phone line? Ah --
was a once-in-a-lifetime event.
But that was early last year, months before the historic privatization of Telebras, the state-owned telephone monopoly with its notorious inefficiencies and high costs. With the break up, pent-up demand for phone connections is being satisfied by a booming cellular scene in Brazil.
While only 19 million, or a little over 11%, of Brazilians own a fixed-line phone connection, 11 million, or nearly 7% and growing, have cellular phones. (By contrast, over 25% of the U.S. population owns a cell phone.) Clamoring for any telecommunication nearly guarantees that while fixed lines are still being (slowly) laid, cellular usage growth will far outpace that in more developed regions. (Some Brazilian cellular companies have even complained, though not too loudly, that demand is outpacing their supply of handsets.)
"In terms of size and resources, Brazil is one of the most exciting countries" for cellular companies, says Paul Aran, Latin American telecommunications analyst for
Credit Lyonnais Securities
The demand for cellular services has translated into growing profits and profit projections, and Brazilian celco stocks (all of which trade in the U.S. as American Depository Receipts) have gone through the roof. Of the eight cellular operators that emerged from the Telebras breakup, five have seen their stock prices rise over 80% year to date, led by
Tele Nordeste Celular
( TND) whose stock has risen 165% since January. Shares of
Tele Sudeste Celular
( TSD), which has a 70% market share and aggressive subscriber growth strategy, have risen 73% in the last month alone.
Even in the poorest regions, people are going wireless, in part due to a Brazilian law that prevents anyone from being denied a phone line if they request one. When the infrastructure was less developed, the law was more a kind theory. Now the nascent companies must worry about nonpayment by the many poverty-stricken Brazilians. One successful solution has been the introduction of prepaid cell phone service, allowing demand to be met without as many financial risks to the operator.
Foreign management is another factor contributing to a boom in cellular stocks, encouraging investors about the short- and long-term abilities of Brazil's cell phone companies to effectively meet demand. As the Brazilian celcos begin to consolidate, those with foreign management with proven track records are favored to survive. Among the potential winners are
Telesp Celular Participacoes
, bought by
Tele Celular Sul
, bought by
Credit Suisse's Aran is particularly keen on Telesp, which operates in the richer Sao Paulo region. The improving Brazilian economy will affect its business capital, Sao Paulo, first. That translates into greater disposable income and higher cell phone usage -- and hence, faster growth. That improves Telesp's prospects for being one of the survivors.
There are naysayers among the cheers. "Given the current valuation levels, we believe that it is improbable that the rally will continue" in Brazilian wireless stocks, warn
Morgan Stanley Dean Witter's
Latin American telecom analysts.
But in an age when everyone is talking about a global information infrastructure buildout which will in short time connect everything to everything else, Morgan's is a minority opinion. Emerging markets are the new frontier of communications, and even if prices are no longer rock-bottom, many are anxious to get their piece.
"Compared to European cellulars, Brazilian companies are cheap," said Mindy Aviles, senior Latin America investment analyst at
. "And it's going to be a fabulous year for the region."