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There are decades where nothing happens; and there are weeks where decades happen­­—Vladimir Lenin

Lenin’s land is at the centre stage at present. Are the next few weeks going to take the world five decades back, to the 70s? Well, it’s anybody’s guess at present.

But here’s what we can say with certitude…

A few global trends such as digitization and decarbonization which began quite a while ago took quantum leaps during the pandemic and are irreversible now. Alongside, two more trends seem to be emerging—deglobalization and decentralization.

The boundaries of the real and virtual world are blurring as jargons such as blockchain, cryptos, metaverse, Web 3.0, go mainstream. Data is, indeed, proving to be as precious as oil, if not more.

But here’s the irony, war-mongering and geopolitical tensions have pushed oil prices through the roof, yet there’s hardly any impact on data prices. Such is the power of digital and virtual world, where people are expected to spend more time in future.

According to Nokia MBiT Index 2021, average per month per user data usage jumped 17 times between 2015 and 2020, i.e., from 0.8 GB to 13.5 GB. Latest quarterly filings of India’s top-3 private sector telecom operators reveal that India’s per user data consumption has jumped substantially during the pandemic.

In Budget 2022, the government announced its intent to auction 5G spectrum in 2022 to facilitate the commercial rollout of 5G in FY23. Now with the rollout of 5G in sight, the trend in data consumption might get further accelerated.

Credit Suisse has already predicted a 20X jump in data consumption across the globe over the next 10 years. And many are expecting Indian private sector telcos to ride this data boom. Are you wondering how you should encash this boom as a stock market investor?

First things first, although these big numbers appear impressive, equity investors should be concerned about whether they will translate into higher profits and higher return on equity/capital employed for telcos.

To know the beneficiaries of 5G revolution it’s imperative to track the developments on five counts:

  • Spectrum pricing and allocation
  • Balance Sheet strengths of telcos
  • Efficiency measured by Average Revenue Per User (ARPU)
  • Strategic partnerships
  • Use-case trails

India has been a unique market for telecom service providers and a rather difficult one.  Spectrum allocation and profitability have been the most critical factors historically.

While the cost of data (per MB) for an Indian consumer has been one of the lowest in the world, at 7.6%, the spectrum cost for telcos as a percentage of aggregate revenue has been one of the highest.

Between 2010 and 2016 Indian telecom operators shelled out around Rs 3.5 lakh crore in 6 rounds of spectrum auctions hoping to recover these costs in future. However, Reliance Jio changed the rules of the game since its launch in 2017. Its aggressively priced voice and data plans compelled the competitors to follow suit to remain in the race.

As a result, the indebtedness of Indian telcos rose substantially and they reported a sharp drop in Average Revenue Per User (ARPU) between FY16 and FY18.

Bharti Airtel, for instance, witnessed a jump in its Net Debt to EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) from ~2.5X in FY16 to 5.1X in FY19.

The ARPU of Bharti Airtel and Vodafone were Rs 194 and Rs 177, respectively, in March 2016 while Idea earned an ARPU of Rs 179. In March 2018, Airtel reported an ARPU of 116 and Vodafone Idea reported an ARPU of Rs 105.

However, some sanity seems to be coming back to the market on data pricing now.

Further, a month-on-month drop in the number of customers reported by Jio and Vodafone over the past few months suggests that the consolidation of SIM might be underway. In other words, with rationalization of entry level and prepaid plan rates, customers seem to be giving up spare/additional SIMs.

Despite this, the data consumption has remained unaffected and, in fact, has increased considerably for Jio over the past three quarters.

Since 3 private sector players control ~90% of the market, the competition is limited. And now that the price-war appears to be history in India’s telecom space, private sector telecom companies are gearing up for 5G.

In fact, they are persuading the government to consider rationalization of spectrum prices.

The TRAI recommended price of Rs 492 crore per MHz in 3.5GHz band would be 16 times higher than the comparable spectrum auction price in other countries in relative terms, they argue.

Since a telecom service provider will require at least 100 MHz of spectrum in 3.5 GHz band, it will result in an outflow of Rs 50,000 crore at the TRAI recommended price. The government will have to walk a tightrope between pricing and industry viability to ensure the success of 5G in India.

5G and Industry 4.0

Some developed countries such as Germany and the US have allocated 5G spectrum to industry to drive Industry 4.0/ the smart manufacturing revolution. As you might be aware, Mercedes has been setting up a smart factory, ‘Factory 56’ based on 5G. Will India adopt similar policies? Remains interesting to track.

As noted by the standing committee on IT, Reliance Jio has developed 5G using entirely indigenous technologies and is keen to offer it to other telcos as well. On the other hand, Reliance Industries has stated that it has already started trials for various use cases/applications of 5G.

Thinking about creating the entire ecosystem of mobile manufacturing rather than depending on just low value-added assembly-led manufacturing is another facet of the potential 5G boom in India. Keeping this aspect in mind you should track the progress of various Production-Linked Incentive (PLI) Schemes.

Do actions reflect the intent of telcos?

Telcos are raising capital, reducing debt and becoming lean by rejigging assets.  As you might be aware, Jio had raised Rs 1.52 lakh crore in FY21 to fuel growth. Recently, Airtel launched a rights issue of Rs 21,000 and also attracted USD 1 billion investments from Google.

Google had invested Rs 33,737 crore in Jio for a 7.73% stake in Q1FY21 and has picked up a 1.28% stake in Airtel recently for Rs ~ 5,250 crore (USD 700 million). The remaining Rs 2,200 crore (USD 300 million) may come by way of multi-year commercial agreements.

According to latest media reports, debt-laden Vodafone Idea may also see capital infusion from its British promoter.

Connecting the dots…

You see, barring the initial years of liberalization of the telecom sector, telecom service providers have been looked upon more or less like other utility services providers. Moreover, their services have been considered like commodities.

In the era of 5G, AI, IoT and Web 3.0, telcos are not just telecom service providers anymore but they might lay the foundation for the proliferation of several other sectors, including smart manufacturing.

It seems tailwinds of change have started flowing strongly for the telecom sector. Now the moot question is, can investors spot opportunities in and outside the telecom services space. After all, India is trying to build an ecosystem within the country to cater to the future demand.

Which companies are you targeting to invest in to ride the 5G boom? Do let us know.

Kotak Mutual Fund recently launched a thematic fund— Kotak Manufacture in India fund. The fund endeavors to capitalize on opportunities in the manufacturing sector and take advantages of 5 prominent themes:

  1. China +1 strategy
  2. Production Linked Incentive Schemes
  3. Deleveraged corporate balance sheets
  4. Boom in the housing sector
  5. And decarbonization

Technologies such as 5G may play a pivotal role in ensuring that India establishes itself as a global manufacturing hub.

You may also like to read: LIC IPO may recreate the Maruti moment of 2003 for markets: Nilesh Shah

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

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