Markets
BSNL’s subscriber count is surging. These four stocks could benefit.
Summary
- Recent tariff hikes by Reliance Jio, Bharti Airtel and Vodafone Idea have brought BSNL more than 2.75 million new subscribers. To sustain this surge, the state-owned company must improve its network quality and expand 4G coverage. Here are four companies that could help it do just that.
The Indian telecom market operates as an oligopoly, with a few major players offering similar services and greatly affecting pricing. When one company lowers prices the others typically follow suit, but the reverse is not always true. We saw an instance of this when Reliance Jio entered the market, prompting price cuts across the board.
Recently, large private firms such as Reliance Jio, Bharti Airtel and Vodafone Idea increased their tariffs by 11-25%, while BSNL's tariffs have remained relatively stable. Its competitive pricing, especially in the lower brackets, has brought it more than 2.75 million new customers, many of them through mobile-number portability. This has helped the company offset its previous losses.
Before we explore how this could be an opportunity for BSNL, let's first learn more about the company.
Financial overview
Bharat Sanchar Nigam Limited (BSNL) was formed by corporatising the erstwhile department of telecom services on 15 September 2000.
It generated an operating revenue of ₹193.billion in FY24, clocking 1.1% year-on-year growth. This fell short of the government's target of ₹200 billion, which was part of a larger ₹3.2 trillion revival package.
The primary contributors to BSNL's operating revenue were the basic, cellular, broadband, and enterprise segments, accounting for 18.5%, 36.2%, 19%, and 26.3% of total revenue, respectively. Revenue from the basic and enterprise segments increased 19.4% and 9.1% to ₹35.8 billion and ₹36.6 billion, respectively.
Notably, revenue from cellular services and the enterprise segment declined during the year. Cellular services revenue fell 6% to ₹70.1 billion, while enterprise business revenue decreased 4.5% to ₹51 billion. The decline in cellular services revenue could be attributed to subscriber churn caused by the company’s lack of 4G services.
Despite this, BSNL reduced its net loss to ₹53.7 billion in FY24 from ₹81.6 billion in FY23, primarily due to lower expenses, especially finance costs, and higher non-operating income.
The company has set revenue targets of ₹244.3 billion for FY25, ₹284.7 billion for FY26, ₹335.5 billion for FY27, and ₹359.6 billion for FY28.
A potential opportunity?
BSNL may be at the cusp of a transformative opportunity. The key to sustaining the recent surge in subscribers is enhancing network quality and expanding 4G coverage. To address this, the government's performance monitoring unit will oversee the rollout of 4G services by BSNL with the cooperation of Tejas, TCS, C-DOT and others.
The department of telecommunications is also considering granting Elon Musk’s Starlink a Global Mobile Personal Communication by Satellite (GMPCS) license, which, in partnership with BSNL, could challenge the dominance of Jio and Airtel by offering more affordable and widely accessible services. Should BSNL and Starlink use satellite technology effectively, frustrated users may switch providers.
Through the partnership, the two companies plan to build robust networks without extensive physical infrastructure, potentially leading to more affordable data plans for consumers. Although BSNL is not listed on the Indian market, companies assisting in its growth could benefit from these developments.
Let’s explore some of these.
#1 Tejas Networks
Having received its biggest-ever order from BSNL, theperformance of Tejas Networks is expected to improve.
In May, BSNL issued an advance purchase order worth over ₹150 billion to a consortium led by Tata Consultancy Services (TCS) for the deployment of a 4G network across the country. Tejas Networks is part of this consortium and will supply and service the Radio Access Network equipment to BSNL.
Tejas Networks designs and manufactures wireline and wireless networking products, with a focus on technology, innovation and R&D. The company's carrier-class products are used by telecom service providers, utilities, governments, and defence networks in more than 75 countries. It is currently a part of Panatone Finvest, a subsidiary of Tata Sons.
Tejas Networks turned profitable in Q4, reporting a profit of ₹1.47 billion for the quarter against a loss of ₹115 million in the corresponding quarter last year. Revenue jumped 168%, from ₹3 billion to ₹132.7 billion.
The company received ₹326.6 million in incentives for FY23 from the government’s production-linked incentive scheme for telecom and networking products.
Tejas Networks has ramped up BSNL's 4G/5G RAN shipments and delivered a large volume of IP/MPLS routers for the backhaul network. It was granted 22 patents in Q4 and now has 335 in total.
With an order book of more than ₹82 billion, the company is well-positioned to capitalise on upcoming opportunities such as BSNL's 4G/5G rollout, Bharat Net phase 3, private telco broadband expansions, and utility network upgrades in India and around the world.
Tejas Networks’s FY25 revenue is expected to be four times FY24 revenue due to the BSNL and Bharatnet order execution.
#2 HFCL
HFCL (formerly known as Himachal Futuristic Communications Limited) is a publicly listed telecom company. It has been in operation since 1987 and is in various segments of manufacturing, research and development (R&D), and turnkey solutions.
The company has won a ₹11.3 billion deal from BSNL to upgrade the telco’s optical transport network (OTN) across the country. The upgrade will cater to the growing requirements of enterprise and FTTH/broadband services, and position BSNL for the future with the launch of 4G services and the anticipation of 5G services in the coming years.
Since its inception, the company has entered various streams of hardware integration in telecommunications. It has manufacturing facilities at Solan in Himachal Pradesh, Salcete in Goa, and New Delhi.
#3 Tata Consultancy Services
Recent price hikes by major Jio and Airtel have led to significant changes in the Indian telecom landscape.
In response to market discontent, TCS and BSNL have signed a ₹150 billion deal to launch 4G services across 1,000 villages in India. By doing so, they hope to provide high-speed internet access to rural areas, thus bridging the digital divide and offering a competitive alternative to Jio and Airtel.
TCS is a shining star in the Tata group of companies and the largest IT services company in Asia. It was the first company listed on the BSE to hit a $100 billion market cap, a feat it achieved in 2018.
It has a global presence, deep domain expertise in multiple industry verticals, and a comprehensive portfolio of services.
The company uses its industry leading suite of products and platforms to deliver high quality, high impact solutions to its clients. It has a reputation for leveraging the latest technologies to serve customers across the world.
In the short term the company is focused on growing profits steadily by maintaining its margins. TCS has handled the wave of attrition in the IT sector better than its peers. The company regularly ranks at the top of the best places to work in India.
In the long term, TCS, with its deep domain knowledge across various verticals, and in-house talent, is well placed to capitalise on the boom in digital technologies all around the world.
#4 MTNL
Reports suggest the government may transfer MTNL's operations to BSNL, pending approval from a government committee and the cabinet. This would give MTNL access to BSNL's nationwide network, aiding BSNL's revival plan with a pan-India presence.
Avoiding a merger means MTNL wouldn't need to delist from the stock exchange and thus have to buy back shares. The telecom department aims for a swift handover to benefit both companies quickly. However, both have struggled to capitalise on recent growth in the sector. Government intervention, potential restructuring, and a possible change in leadership have caused MTNL's stock to surge of late.
The company was established by the government of India in April 1986. Its purpose was to improve the quality of telecom services, expand the telecom network, introduce new services, and generate revenue for telecom development needs of Delhi and Mumbai.
It also provides various types of telecommunication services, including telephone telex, wireless data communication, telematics and internet services.
Conclusion
The recent tariff hikes by Reliance Jio, Bharti Airtel and Vodafone Idea have boosted BSNL's subscriber base, thanks to its cheaper plans. However, this growth may be short-lived unless BSNL improves its network quality and expands its 4G coverage quickly.
Investors should thus remain cautious. How well BSNL and Starlink use satellite technology to expand their networks will be critical in maintaining and growing market share amid evolving competition and infrastructure challenges.
Happy investing!
Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
