Why foreign investors ploughed into India's telecom stocks

FPIs remain bullish on No.2 telecom operator Bharti Airtel and Indus Towers on hopes of higher average revenue per user. (Photo: istockphoto)
FPIs remain bullish on No.2 telecom operator Bharti Airtel and Indus Towers on hopes of higher average revenue per user. (Photo: istockphoto)

Summary

Vodafone Idea's follow on public offer drew in most investors as it had a trickledown effect on Indus Towers which will benefit from the No 3 carrier's 4G and 5G rollouts. The upside from tariff hikes expected post elections also created investors interest for No 2 carrier Bharti Airtel.

Mumbai: Foreign investors poured nearly a billion dollars into telecom stocks in April, their most-favoured sector for the second month in a row, as optimism returns to a sector blighted by flat tariffs, steep debt and protracted litigation. Market experts believe that many of the factors that revived interest in the sector are here to stay, signalling further momentum.

After investing about $960 million in telecom services and equipment companies in March, foreign portfolio investors (FPIs) pumped $991 million in April, a Mint analysis showed, betting on the revival of Vodafone Idea Ltd, expected tariff hikes and rising phone usage.

FPIs jostled for shares in Vodafone Idea's 18,000 crore follow-on public offering (FPO), India's largest, also sparking interest in tower company Indus Towers, which stands to gain from the telco's planned rollout of 4G and 5G networks. Bharti Airtel picked up as well, as investors eye long-awaited tariff hikes later this year.

“In April, foreign investors showed interest in telecom stocks, likely due to their participation in the FPO of Vodafone Idea," said Abhilash Pagaria, head, Nuvama Alternative & Quantitative Research.

The debt-laden telco's FPO anchor book attracted prominent names like GQG Partners, Fidelity Investments, UBS Fund Management, Jupiter Fund Management, Abu Dhabi Investment Authority, Morgan Stanley Investment Funds and Societe Generale. Other than FPIs, mutual funds and domestic financial institutions also queued up for Vodafone shares.

FPIs remain bullish on No.2 telecom operator Bharti Airtel and Indus Towers on hopes of higher average revenue per user (ARPU), Pagaria said.

“According to Nuvama Alternative math, Indus Towers is expected to make it to the MSCI Standard Index in the May review, potentially attracting close to $250 million in further investments," said Pagaria, who believes that overall, optimism prevails in the sector.

Shares of Bharti Airtel and Indus Towers have surged 26% and 66% respectively so far in 2024, while Vodafone Idea’s stock has dropped 21%.

In the past, various factors have kept investors away from telecom stocks. Apart from cut-throat competition and flat tariffs, telcos are capital-guzzlers due to costly airwaves and network upgrades. Litigation over adjusted gross revenues (AGR) ended with a Supreme Court order in 2019 ordering stiff payouts by telcos, and was followed by a government-backed relief package in 2021 and a new telecom law in 2023. Meanwhile, one-time spectrum use fees is still in the courts.

Prashant Singhal, EY’s emerging markets technology, media & entertainment and telecommunications sector leader, said, “There are several positives for the sector in the near to medium term, and potential tariff hikes is the most important one".

Also read: Why MCX is warming up to a wider pool of FPIs

Brokerage houses expect all telcos - Airtel, Vodafone Idea and Jio - to go for two rounds of tariff hikes, roughly 20-25% each, one immediately after general elections and the second one next year, lifting Arpu, a key profitability metric for telcos.

According to BofA Securities, Indian consumers have the capacity to absorb a 20-25% increase, and continued government support and potential investments in data centers to leverage AI-driven opportunities will help the sector.

“We are turning more optimistic on the near-term sector momentum as we 1) estimate magnitude of expected tariff hike to be higher at 20-25% vs our earlier expectation of 10-15%; 2) Improving cash-flows on back of hikes to be utilized by telcos to grow high margin fiber broadband, enterprise/data-center offerings; 3) No telco keen to disrupt the market dynamics," BofA Securities said in a 2 May report.

Telecom equipment manufacturers Tejas Networks and GTL Infra have surged by 29% and 21% respectively this year, while state-run ITI Ltd has fallen 9%. The telecom equipment sector includes manufacturers of wireless 4G/5G radio access networks, satellite communication and broadcast radio, wireline products like switches, routers and optical transport networks, design-led manufacturing companies, and network management & monitoring firms.

Both global and domestic macro trends are fuelling investment in telecom, said Chintan Bhatt, director - listed investments, Waterfield Advisors.

Globally, the US 'Rip and Replace' scheme requires US telcos to replace Chinese equipment with non-Chinese alternatives. The US Congress has allocated $1.9 billion for the scheme, with the potential addition of another $3 billion for successful execution. “This global move to replace Chinese equipment (China+1) opens the door for Indian telecom equipment makers to earn international revenue which is more profitable," Bhattsaid.

Also read: Six months wait for new telecom law rules

The Indian government has set aside 1.4 trillion for BharatNet, touted as the world's largest rural broadband connectivity programme, leveraging optical fiber and satellite communications. Additionally, the railways' upgrade of the anti-collision system Kavach to LTE (4G/5G-based system) presents a 30,000 crore opportunity for telecom equipment makers, Bhatt added.

Besides, the PLI scheme for local manufacturing of telecom and networking products provides eligible companies with a 4-6% incentive on incremental sales. Also, applicants approved under the design-linked PLI scheme can receive an extra 1% incentive.

Other factors driving demand for telecom equipment include rising smartphone usage, video content consumption, growth in 5G subscribers, and investments in data centers. Market experts believe these trends are here to stay, offering a promising long-term growth trajectory for companies in the telecom space, which will continue to attract both foreign and domestic capital.

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