Motilal Oswal bullish on telecom stocks amid tariff hike expectations

A recovery is in the offing in India’s telecommunications sector, with potential tariffs hikes and a shift to high-speed networks set to bolster revenue, according to a top-performing fund manager.

A recovery is in the offing in India’s telecommunications sector, with potential tariffs hikes and a shift to high-speed networks set to bolster revenue, according to a top-performing fund manager.

“We are likely headed for a large hike in tariffs,” said Niket Shah, chief investment officer at Motilal Oswal Asset Management Co. He estimates that one such increase can boost the industry’s EBITDA by more than ₹50,000 crore , and add up to 7 trillion rupees ($84 billion) in combined market value.

The likely tariff increase will help inject new life into a sector that has grappled with cut-throat competition and aggressive policy actions in recent years, said Shah. America’s top wireless carrier AT&T Inc.’s average revenue per user is $55, while the measure is as low as $2 in India, he said. 

The optimism was palpable last week as Vodafone Idea Ltd., the smallest of the three players in India, raised $2.2 billion in a share sale that was oversubscribed more than six times. Nuvama Institutional Equities said this fundraise may mark a turning point for the sector, providing the company the much-needed capital to compete with larger rivals Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd.

Read: Govt to back Voda Idea FPO to ensure competition: TV Somanathan“It’s clear that the government doesn’t want to see telecom become a duopoly, so we can expect policy support,” said Shah, who oversees $3.2 billion across five equity funds. Motilal Oswal’s flagship fund has returned about 58% in the past year, beating over 90% of peers. 

Shah held Bharti Airtel and tower operator Indus Towers Ltd. in his portfolios at the end of March, data compiled by Bloomberg show. 

Mukesh Ambani’s Jio disrupted the market in 2016 with cheap 4G data services, sparking a price war that reshaped the sector into a near-duopoly dominated by Jio and Bharti. Average revenue per user plunged, burdening telecom operators with massive debts.

In 2022, Vodafone Idea converted the dues it couldn’t pay to the government into a 32% equity stake.

The industry is now showing signs of stabilizing, driven with investments into newer technology and efforts by companies to clean up balance sheets. Antique Stock Broking Ltd. estimates a 15% to 17% tariff increase for the sector — the first hike since 2021 — after on-going elections conclude.

The shift in sentiment means that some shares are expensive relative to history. Bharti Airtel trades at nearly 37 times its forward earnings, versus the two-year average of 31. Also, Vodafone Idea continues to lose subscribers to competitors. Analysts caution that the fundraise may not be sufficient to stem this decline.  

Mobile operators are urging the government to discontinue 2G services, aiming to cut network-related expenses and transition over 200 million users to higher data plans. Motilal Oswal’s Shah expects a full migration of all customers to 4G or 5G within the next two to three years. 

These price hikes, alongside the migration and lower interest burden, will drive profits in the coming years, he said.

More stories like this are available on bloomberg.com

Like (0)
Previous April 29, 2024 4:07 pm
Next April 29, 2024 4:08 pm

Related posts

  • Buzzing stocks.Stocks that will see action today: May 27, 2024

    Adani Ports and Special Economic Zone Ltd (APSEZ) has said its flagship Mundra Port has created yet another record by welcoming the largest container ship to call at an Indian port. MSC Anna is a huge vessel with an overall length of 399.98 m (roughly the length of four football fields) and a staggering capacity of 19,200 TEUs (twenty-foot equivalent units), which makes it the largest container ship by capacity to ever visit an Indian port, APSEZ said in a statement.

    stock options May 27, 2024
  • Multi-maturity U.S. Treasury yields rise rapidly

    The convergence of interest rate cut expectations is rewriting the narrative of global capital markets. Recently, due to the impact of U.S. economic fundamentals such as inflation and employment that exceeded expectations, market expectations for the Federal Reserve to cut interest rates within the year have declined. The “anchor of global asset pricing” has made waves again. The 10-year U.S. Treasury yield recently broke through the 4.5% mark and remains above this point. Some market participants are worried that the “nightmare” of 10-year U.S. bond yields pointing to 5% may strike again. Analysts believe that the current asset prices are more reflected in the correction of front-running transactions in anticipation of interest rate cuts. Looking ahead, interest rate cut expectations may continue to swing driven by data and geopolitics, affecting the trend of U.S. bond yields. Multi-maturity U.S. Treasury yields rise The rapid rise in U.S. bond yields has once again attracted market attention. On April 10, local time, as the U.S. Consumer Price Index (CPI) in March exceeded expectations across the board, the market was worried about the prospect…

    stock options April 15, 2024
  • U.S. 30-year mortgage rates fall for first time since late March

    U.S. mortgage rates fell for the first time since late March, giving homebuyers some relief and boosting applications for home purchases and refinancing mortgages

    stock options May 8, 2024
  • Former Malaysian Prime Minister Mahathir Mohamad under investigation by Anti-Corruption Commission

    △Former Prime Minister of Malaysia Mahathir Mohamad (data map) According to a report by Bernama on the 25th, former Malaysian Prime Minister Mahathir Mohamad is being investigated by the Anti-Corruption Commission regarding issues such as property declaration. (Headquarters reporter Xu Quanle)

    stock options April 25, 2024
  • FPIs turn buyers, snap 11-session selling streak

    Foreign portfolio investors turned buyers on Friday for the first time in May, snapping a 11-session selling streak that saw a selloff of over ₹37,000 crore in the cash market.

    stock options May 19, 2024
  • TSMC rose more than 1% before the market opened, system-level wafer technology will usher in a major breakthrough

    Gelonghui April 26 | TSMC (TSM.US) rose 1.3% to US$138.36 before the market opened.

    stock options April 26, 2024