Top Indian fund bullish on telecom stocks amid tariff hike bet, ET Telecom

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 500 billion rupees, 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.

“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 India’s 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.