Why the CIO of Motilal Oswal is optimistic about telecom stocks

A top-performing fund manager believes that a turnaround in India’s telecom industry is imminent, with prospective pricing rises and a move to high-speed networks expected to boost income.
The chief investment officer of Motilal Oswal Asset Management Co., Niket Shah, said that “we are likely headed for a large hike in tariffs.” According to his estimations, a single rise of this kind could raise the industry’s Ebitda by over 500 billion rupees and increase its whole market value to 7 trillion rupees, or $84 billion.

According to Shah, a sector that has recently struggled with fierce competition and assertive regulatory measures would benefit from the anticipated tariff rise.According to him, the average revenue per customer for AT&T Inc., the leading cellular provider in America, is $55, whereas it is just $2 in India.

After Vodafone Idea Ltd., the smallest of the three Indian companies, raised $2.2 billion in an oversubscribed share offer more than six times over last week, there was a noticeable sense of excitement. This financing, according to Nuvama Institutional Equities, may signal a sea change for the industry by giving the business the much-needed funding it needs to take on bigger competitors like Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd.

“Policy support is something we can expect because it’s evident that the government does not want telecom to become a duopoly,” said Shah, who manages $3.2 billion in five equity funds. The flagship fund of Motilal Oswal has outperformed over 90% of its rivals, returning over 58% over the last year.
At the end of March, Shah’s holdings included tower operator Indus Towers Ltd. and telecom company Bharti Airtel, according to data gathered by Bloomberg.

With its low-cost 4G internet offerings, Mukesh Ambani’s Jio upended the industry in 2016. This led to a pricing war that saw Jio and Bharti dominate the market, reshaping it into a near-duopoly. Telecom companies are deeply indebted as a result of the sharp decline in average revenue per subscriber.
Vodafone Idea transformed the government debt it was unable to pay into a 32% ownership position in 2022.

The sector is now beginning to stabilize thanks to investments in more advanced technologies and initiatives by businesses to improve their balance sheets. After India’s ongoing elections are over, Antique Stock Broking Ltd predicts a 15% to 17% price rise for the industry, marking the first increase since 2021.

Due to the change in opinion, some shares are more costly than they have ever been. Compared to the two-year average of 31, Bharti Airtel trades at roughly 37 times its anticipated earnings. Additionally, rivals are gaining users from Vodafone Idea. Analysts warn that this slide could not be stopped by the financing.

With the goal of reducing network-related costs and moving more than 200 million consumers to more expensive data plans, mobile carriers are pleading with the government to end 2G services. Within the next two to three years, Motilal Oswal’s Shah anticipates that all of its clients will have switched to 4G or 5G.

According to him, the migration and reduced debt load, in addition to these price increases, would propel earnings in the next years.