Why CLSA is optimistic about Indian telecom stocks in 2022

Calendar 2021 was a buoyant year for India’s telecom companies. In stock performances, Bharti Airtel ended the year up 35% and outperformed the market by 12 percentage points. Even troubled telecom operator Vodafone India outperformed the market, albeit by six percentage points.

Tata Communication’s stock gained 10 percentage points more than the benchmark indices while Sterlite Technologies, an infrastructure services play, outperformed by 24 percentage points.

However, Indus Towers lagged and was up only 3% despite key shareholder Vodafone Idea continuing its operations.

The year 2021 was a year of tariff hikes and relief packages in a sector characterized by oligopoly. Despite the Covid-19 second wave, industry revenue increased 15% led by a five percentage points increase in 4G penetration to 66%. In addition, telecom operators Reliance Jio, Bharti Airtel and Vodafone Idea spent $11 billion in 4G auctions. 

And according to Hong Kong-based investment advisory firm CLSA, the Indian telecom sector is expected to see a compound annual growth rate of 13% by FY24 led by tariff hikes and rising 4G data adoption.

CLSA reiterated a ‘buy’ rating on Bharti Airtel and tagged the stock as its preferred pick. Bharti Airtel trades around 7.5 times its one-year forward enterprise value (EV)-to-operating income (Ebitda), which is a 13% discount to its five-year average. CLSA raised its target price to Rs 910 apiece compared with the previous target of Rs 863.

Indus Tower, at 5.5 times its EV/ebitda, offers deep value besides the 6% dividend yield. CLSA has a target price of Rs 360 versus its current price of Rs 260.

Growth drivers

CLSA anticipates average revenue per user (ARPU) to see year-on-year growth led by tariff hikes by all three major telecom operators, while 4G penetration is expected to reach 83% by fiscal 2024.

The investment firm foresees another 20% tariff hikes from the second half of fiscal 2022 to FY24, leading to an estimated 13% growth in sector revenue to Rs 2.5 trillion ($34 billion) by FY24.

The potential review of adjusted gross revenue (AGR) – filed by Vodafone Idea before the Supreme Court – and next spectrum EMI due date in fiscal 2026 will allow sector improvements.

“Vodafone Idea’s financial crisis is already averted. Meanwhile, pricing-led competition is easing and even as we forecast RJio revenue share to reach 44% by FY24, we also foresee upside potential to Bharti's 34% share,” said Deepti Chaturvedi, analyst at CLSA.

New frontiers

Bharti Airtel and Reliance Jio continue to deepen the 4G penetration. The top two operators’ battle will move beyond 4G share in digital services, home broadband and enterprise offerings, and will spill over to 5G this year as India commences the 5G transition.

“We believe that 2022 will also be decisive for Reliance Jio to create an ecosystem of own apps (i.e., Jio Mart) vs Bharti’s digital services under #airtelThanks in partnerships to boost subs and ARPU,” said Chaturvedi, adding that India’s smartphone shipments increased 16% year-on-year with a fifth of the shipments were 5G.

Key 2022 events

The current calendar year will see big events—5G spectrum auction following the likely cut in 5G spectrum prices, potential review of AGR dues, telecom companies’ stake sales in Indus Tower and likely Reliance Jio IPO.

CLSA anticipates 5G spectrum cost would likely be cut from $7 billion for 100MHz in 3.3-3.6GHz bands besides extension of licence tenure to 30 years from the current 20 years. 

“India is a mobile-first country; lower 5G prices will boost IRR and spectrum purchases will multiply opportunities, alongside ongoing sector improvements and strong growth,” said Chaturvedi.