scorecardresearchTelecom: Some bright spots glimmer; should you bet on the sector?
On April 8, 2022, the BSE Telecom sector hit its all-time high of 1971.51 but at present, it is about 17% down from that level.

Telecom: Some bright spots glimmer; should you bet on the sector?

Updated: 11 Aug 2022, 11:14 AM IST
TL;DR.
  • The telecom sector has been under acute pain for a long time now, thanks to cutthroat competition after the entry of Reliance Jio in the sector in 2016.

The telecom sector has been in the news of late. The sector has just witnessed the conclusion of the 5G spectrum auction. Besides, the Government of India announced a rescue package of 1.64 lakh crore for Bharat Sanchar Nigam Limited (BSNL).

The sector has been under acute pain for a long time now, thanks to cutthroat competition after the entry of Reliance Jio in the sector in 2016.

On April 8, 2022, the BSE Telecom sector hit its all-time high of 1971.51 but at present, it is about 17% down from that level. Year-to-date (YTD), the telecom index is down 10%. Among its components, Bharti Airtel is up 5% while

Tata Communications and Vodafone Idea are down 26% and 44%, respectively, YTD. Shares of Reliance Industries, which owns Reliance Jio, are up 9% in the same period.

The Q1 show

Bharti Airtel reported its June quarter consolidated profit of 1,606.9 crore in Q1FY23, up 467% year-on-year (YoY) against 283.5 crore reported in the same quarter last year.

Consolidated revenue from operations rose 22% to 32,805 crore in the quarter under review (Q1FY23), backed by strong and consistent performance delivery across the portfolio. It had reported a revenue of 26,854 crore in the same period last year, the company said in a regulatory filing.

The Average revenue per user (ARPU), which is a key metric of profitability for telecom service providers, increased to 183 in Q1FY23 from 146 in Q1FY22, up 25.3%.

Net profit of Reliance Jio rose to 4,335 crore for Q1FY23 from 3,501 crore in the year earlier. Revenue rose 22% to 21,873 crore in the June quarter from 17,994 crore last year.

ARPU of Reliance Jio rose to 175.7 per month during the June quarter of FY23, up 27.3% from a year earlier and 4.7% from the last quarter of FY22.

Vodafone Idea reported a consolidated loss of 7,296 crore for Q1FY23 against a loss of 7,312 crore in the corresponding quarter last year. Its quarterly revenue stood at 10,410 crore in Q1FY23 against 9,152.3 crore in the same quarter last year.

Vodafone Idea's ARPU improved to 128, up 23.4% YoY and 3.6% QoQ aided by tariff hikes.

 

Telecom price chart of Airtel, Vodafone Idea and Reliance Industries. 
Telecom price chart of Airtel, Vodafone Idea and Reliance Industries. 

Some bright spots glimmer

The sector has some bright spots at this juncture. The biggest bright spot is the launch of the 5G network. The 5G auction is complete and media reports suggest that Reliance Jio and Bharti Airtel planning to launch 5G services in select cities as early as the end of August.

The launch of the 5G network may help telecom companies generate new revenue streams, thanks to the growing might of new technologies such as artificial intelligence, the internet of things, the cloud and Web 3.0.

There is speculation that due to the 5G rollout, the telecom company can go for another round of price hikes which is the second factor that will augur well for the telecom sector. Telecom firms such as Bharti Airtel and Vodafone Idea have already indicated that they might go for tariff hikes as the sector still functions at unsustainably low prices and tariff hikes at regular intervals will help it generate reasonable returns and keep up future investments.

Should you bet on the telecom sector?

In an interview with CNBC-TV18 a few days ago, ace investor Rakesh Jhunjhunwala said that he does not think the telecom sector is a good sector to invest in because it always requires fresh investments and therefore there is no true cash generation.

Cumulatively, the sector is still under heavy debt and the recent 5G spectrum bid will further raise its debt.

Jitendra Upadhyay, Senior Equity Research Analyst of Bonanza Portfolio pointed out that debt continues to remain high for the sector and after the 5G auction, the industry level debt would increase further to around more than 6 lakh crore as of March 2023. Currently, the telecom sector has a debt of about 4.7 lakh crore.

"Telcos have been focusing on deleveraging, and after the purchase of the 5G spectrum, Jio’s net debt will increase to over 1.80 lakh crore and Bharti Airtel's net debt is expected to increase somewhere around 1.60 lakh crore which should be looking to reduce through its rights issue of 15,000 crore pending and 5,000 crore from preferential issue to Google. Vodafone Idea's net debt will go above 2 lakh crore, Vodafone Idea is also looking for a fundraiser," said Upadhyay.

Tanusree Banerjee, Co-Head of Research, Equitymaste underscored while the growth opportunities in the Indian telecom sector look very appetizing to investors, one needs to be very careful about the quality of balance sheet and health of cash flows while selecting stocks from the sector.

"The telecom sector’s debt levels are set to cross 6 lakh crore from 4.7 lakh crore in early 2022, with companies having made commitments of more than 1.5 lakh crore towards 5G spectrum payments. The debt could cause a significant dent in profits if interest rates continue to get steeper," said Banerjee.

Jatin Damania, Vice President - Fundamental Research, Kotak Securities is positive about Bharti Airtel. He said the company is expected to benefit from an improvement in industry health underpinned by rising ARPUs, improvement in subscriber mix and 5G rollout, which will propel Bharti’s several digital/enterprise initiatives and enable a transition from a telecom to a technology company in the coming years.

Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.

Some fundas to ace the markets.
Some fundas to ace the markets.