Morgan Stanley's bull call on India telecom picks up supporters
Investors are piling into India's leading wireless carriers, betting that a shakeout in the world's second-largest mobile market has started a recovery that won't be derailed by the need for big capital spending.
Aditya Birla Sun Life Asset Management Co., SBI Funds Management Pvt., HDFC Asset Management Co. and L&T Investment Management Ltd. are among those that have bought more of Bharti Airtel Ltd, making it the second-best performer this quarter on India's benchmark index. Morgan Stanley said in a 22 October report that the nation has become its preferred Asian telecom market, given price increases by newest entrant Reliance Jio Infocomm Ltd and faster-than-expected industry consolidation.
A price war unleashed by the entry of India's richest man into telecom last year forced rivals to match Reliance Jio's offers of free calls and cheap data, whittling down the competition as revenues plunged. From a dozen operators at the start of the year, the sector could end up with just the three fittest, Kumar Mangalam Birla, the billionaire chairman of Idea Cellular Ltd said last month. Those left standing are poised to benefit, though they will need to spend heavily on network upgrades.
"Investors expect telecom company profits to improve meaningfully once the nearterm pressures ease, like a phoenix that rises again from ashes," said Sanjay Mookim, an India equity strategist at Bank of America Merrill Lynch. This will "require large amounts of capex at some operators. The path to that ultimate nirvana is likely to, therefore, be bumpy."
Bharti Airtel raised its capital spending forecast by 25% to Rs25,000 crore ($3.8 billion) for the year to March 2018, according to a 1 November earnings call with analysts.
Deutsche Bank AG predicted in a 1 November report that Bharti Airtel will spend about Rs15,600 crore in the 2019 financial year, excluding spectrum costs, while a proposed combine of Vodafone Group Plc.'s India unit and Idea Cellular may have capex of 125 billion rupees annually in the medium term.
Reliance Jio, controlled by richest Indian Mukesh Ambani, will spend about Rs7,000 crore on capex every quarter for the next few quarters, Anshuman Thakur, head of strategy and planning at Reliance Industries Ltd told reporters on 13 October.