A few points of light twinkle; should we bet on the sector?

The telecommunications sector has been in the news lately. The industry has just witnessed the conclusion of the 5G spectrum auction. In addition, the Indian government has announced a rescue program for 1.64 crore lakh for Bharat Sanchar Nigam Limited (BSNL).

The sector has been suffering for a long time, thanks to fierce competition after Reliance Jio entered the sector in 2016.

On April 8, 2022, the BSE Telecom sector reached its all-time high of 1971.51, but at present it is down about 17% from that level. Year-to-date (YTD), the telecommunications index is down 10%. Among its components, Bharti Airtel is up 5% while

Tata Communications and Vodafone Idea are down 26% and 44%, respectively, since the start of the year. Shares of Reliance Industries, which owns Reliance Jio, rose 9% over the same period.

Bharti Airtel announced its consolidated profit for the June quarter of 1,606.9 crore in Q1FY23, up 467% year-on-year (YoY) from 283.5 crore reported in the same quarter last year.

Consolidated operating revenue increased by 22% to 32,805 crores in the quarter under review (Q1FY23), supported by strong and consistent performance across the portfolio. He had declared a turnover of 26,854 crore during the same period last year, the company said in a regulatory filing.

The average revenue per user (ARPU), which is a key indicator of the profitability of telecommunications service providers, increased to 183 at T1FY23 from 146 in Q1FY22, up 25.3%.

Reliance Jio’s net profit increased to 4,335 crores for Q1FY23 from 3,501 crore the previous year. Revenue increased by 22% to 21,873 crores in the June quarter from 17,994 crores last year.

Reliance Jio’s ARPU increased to 175.7 per month in the June quarter of FY23, up 27.3% year-over-year and 4.7% from the last quarter of FY22.

Vodafone Idea recorded a consolidated loss of 7,296 crore for Q1FY23 against a loss of 7,312 crore in the corresponding quarter of last year. Its quarterly turnover amounts to 10,410 crores in Q1FY23 versus 9,152.3 crores in the same quarter last year.

Vodafone Idea’s ARPU improved to 128, up 23.4% year-on-year and 3.6% quarter-on-quarter, helped by price increases.

Telecom price chart from Airtel, Vodafone Idea and Reliance Industries.

A few bright spots twinkle

The sector has some bright spots at this point. The biggest positive is the launch of the 5G network. The 5G auction is over and media is suggesting that Reliance Jio and Bharti Airtel are planning to launch 5G services in select cities as early as the end of August.

The launch of the 5G network could help telecom companies generate new revenue streams, thanks to the growing power of new technologies such as artificial intelligence, Internet of Things, cloud and Web 3.0.

There are speculations that due to the rollout of 5G, the telecom company may opt for another round of price hikes, which is the second factor that bodes well for the telecom sector. Telecom companies such as Bharti Airtel and Vodafone Idea have already indicated that they may opt for tariff hikes as the sector is still operating at unsustainable prices and tariff hikes at regular intervals will help it generate reasonable returns and maintain future investments.

Should we bet on the telecom sector?

In an interview with CNBC-TV18 A few days ago, ace investor Rakesh Jhunjhunwala said that he does not think the telecommunications sector is a good sector to invest in because it always requires new investment and therefore there is no real cash generation.

Cumulatively, the sector is still heavily indebted and the recent offering of 5G spectrum will further increase its indebtedness.

Jitendra Upadhyay, senior equity research analyst at Bonanza Portfolio, pointed out that debt remains high for the sector and that after the 5G auction, industry-level debt would rise further to around more than 6 lakh crore in March 2023. Currently, the telecom sector has a debt of around $4.7 billion.

“Telecom operators have been focusing on deleveraging, and after the purchase of 5G spectrum, Jio’s net debt will increase to more than 1.80 lakh crore and Bharti Airtel’s net debt is expected to rise somewhere around 1.60 lakh crore which is expected to seek reduction through its rights issue 15,000 crore pending and 5,000 crore from the preferential issue to Google. Vodafone Idea’s net debt will exceed 2 lakh crore, Vodafone Idea is also looking for fundraising,” Upadhyay said.

Tanusree Banerjee, Co-Head of Research, Equitymaste pointed out that while the growth opportunities in India’s telecom sector look very appealing to investors, one needs to be very careful about the quality of the balance sheet and the health of cash flows. cash when selecting sector stocks.

“Debt levels in the telecom sector are expected to cross 6 crore lakh’s 4.7 lakh crore at the start of 2022, with companies having made commitments of more than 1.5 lakh crore towards 5G spectrum payments. Debt could lead to a significant drop in earnings if interest rates continue to rise,” Banerjee said.

Jatin Damania, Vice President – Fundamental Research, Kotak Securities is positive about Bharti Airtel. He said the company should benefit from improved industry health supported by increased ARPUs, improved subscriber mix and 5G rollout, which will propel several digital initiatives/ Bharti’s business and enable a transition from a telecommunications company to a technology company in the years to come. years.

Disclaimer: Opinions and recommendations are those of individual analysts or brokerage firms and not of MintGenie.

Some fundamentals to dominate the markets.

Some fundamentals to dominate the markets.