Are Good Days Ahead for Telecom Stocks?

Telecom is a critically important sector of the economy. In our interconnected world, 'network' is as important a food, clothing, and shelter.

In India, however, the telecom sector has been plagued by many problems - tight regulations, high tariffs, scams, abrupt changes in policy, dominance of a few companies - there is always something.

In spite of all these challenges, the sector has thrived. Consumers have benefited from the fierce competition and low prices.

The Indian telecom industry has grown to become the second largest in the world after China.

As of December 2023, India's total telecom subscriber base was 1.079 billion (bn). This includes both wireless and wireline subscribers.

Everyone has a cell phone. Apart from some extremely rural areas, everyone has access to telecom services in the country.

This is reflected in India's high tele-density. In urban areas, it's 133.76% and in rural areas, it's 58.56%. These numbers are steadily increasing.

However, as is usually the case, there is one major challenge facing the telecom sector. The sector is a duopoly. Two large firms dominate - Bharti Airtel and Reliance Jio. The third largest firm, Vodafone Idea (VI) has been struggling under a massive debt burden.

If the company were to go under, the resultant duopoly would be bad news for consumers. In such a scenario, Airtel and Jio would have been able to raise tariffs at will. Thankfully, that doesn't seem to be the case anymore.

A Mega FPO

In a major development in the telecom space, Vodafone Idea has completed a massive Rs 180 bn follow on public offering (FPO). The market is also pleased that the parent firm, the Aditya Birla group invested Rs 20.75 bn.

This fundraising - India's biggest FPO - will enable the company to make critical investments in its 4G and 5G networks. It will also help the company provide better services and prevent the loss of subscribers to Airtel and Jio.

Finally, the company will be able to raise more funds via debt in the near future and also participate in the upcoming telecom auctions in a few months.

A Better Ecosystem

Thus, the sector could return to a healthy 3+1 (including BSNL) situation.

This will not only benefit the overall growth of the sector, but it would also help to keep the inevitable tariff hikes in check due to the increased competition, at least to an extent.

Also, these developments would be beneficial to consumers too, as they would have the choice of availing the 5G services of three private telcos instead of two.

VI, in particular, has a large number of legacy 2G subscribers who can be upgraded to 4G/5G in the coming months. This migration of subscribers will also help the company reduce costs by ramping down its legacy 2G network.

The FPO will also have a positive impact on Indus Towers. The telecom tower company will benefit from VI's 5G rollout. It will receive more tenants on its towers, thus improving its profitability. The tower firm also has about Rs 60 bn in receivables from VI, as per an article from Business Standard.

Tariff Hikes Coming

Despite the increased competition, tariff hikes are inevitable. All three private telcos will hike rates soon. This will increase their average revenue per user (ARPU).

Higher ARPUs are essential to generate a decent return on investment. The telecom sector is a very capital-intensive and these companies will need to generate profits eventually. The only way to achieve that is higher prices for their services.

However, this doesn't mean consumers have to worry too much. Tariff hikes are unlikely to rise beyond 20% over the next few years. This is because most of the 5G roll out of the telcos would be over by then. These firms will then depend increasingly on value added services for higher profits.

Another source of revenue would be providing enterprise services, i.e., the B2B business as opposed to the traditional B2C business. Telcos can address the connectivity needs of large companies with their 5G networks, especially in heavy data related businesses.

This is a lucrative business for telcos. The more 'enterprise services' contributes to the revenue of these firms, the need for aggressive tariff hikes on individual consumers will reduce.

The Long-Term Picture is Bright

The prospects of the sector in the long-term are incredibly good. 5G offers significant business opportunities for many years.

Also, as these firms are now well-entrenched, the likelihood of a new competitor comping in and disrupting the industry is extremely low.

Thus, after the 5G ecosystem matures towards the end of the decade, and the world moves towards 6G, these private telcos are going to grab the opportunity with both hands.

As per industry estimates, the Indian telecom industry as a whole is expected to reach a size of US$ 70 bn over the next five years. The future certainly appears bright.

If you don't have telecom stocks in your portfolio, you can get started on the Equitymaster website:

• List of telecom stocks in the market
• Telecom sector report
• Telecom sector results
• Screener: Best 5G Stocks in India
• Top stocks riding the 5G wave in India

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