Customers wait to recharge their mobile phones as a vendor checks another device at a mobile phone store in the Dharavi slum area of Mumbai, India, on Tuesday, 12 August 2014. (Photo: Dhiraj Singh / Bloomberg)

Morgan Stanley's Bull Call on India Telecom Picks Up Backers

(Bloomberg) -- 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 an Oct. 22 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 near-term 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.”

Morgan Stanley's Bull Call on India Telecom Picks Up Backers

Bharti Airtel raised its capital spending forecast by 25 percent to 250 billion rupees ($3.8 billion) for the year to March 2018, according to a Nov. 1 earnings call with analysts.

Deutsche Bank AG predicted in a Nov. 1 report that Bharti Airtel will spend about 156 billion rupees 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 70 billion rupees on capex every quarter for the next few quarters, Anshuman Thakur, head of strategy and planning at Reliance Industries Ltd. told reporters on Oct. 13.

Morgan Stanley's Bull Call on India Telecom Picks Up Backers

Bharti Airtel shares have risen 26 percent this quarter, including its best monthly gain since early 2004, compared to a 5.8 percent increase in the S&P BSE Sensex. Idea Cellular is up 24 percent since Sept. 30, after losing 9 percent in the previous quarter, as investors including SBI Funds Management and Sundaram Asset Management Co. Ltd. bought the shares.

“We believe that there is deep value in this sector,” Sunil Subramaniam, CEO of Sundaram Asset Management, wrote in an emailed response to questions. “There have been moves towards consolidation and asset sales which have made the long-term future outlook more viable. So we look at this sector for any scheme which has a long-term investment outlook.”

Aditya Birla Sun Life and L&T Investment and HDFC Asset Management declined to comment.

The market started to show early signs of repair from October, Himanshu Kapania, Idea Cellular’s managing director told analysts in a recent earnings call. Financial pressures have forced sub-scale operators with limited or no 4G footprint to exit or combine with others, an “encouraging prospect for the remaining three to four players in the calendar year 2018,” he said.

Turning Point

Analysts have also taken an October tariff increase by Reliance Jio as something of a turning point, after it first started charging for services in April. Goldman Sachs Group Inc.’s Manish Adukia and Piyush Mubayi wrote Oct. 24 that they expected the new entrant to raise tariffs every few months, with the next potential increase in January.

With Reliance Jio “gradually” raising prices, trends will start improving for Bharti Airtel in the first three months of next year, wrote the Goldman analysts.

A lot will depend on whether Reliance Jio meets those expectations. The company went back to offering sweeteners Nov. 9 when it announced as much as 100 percent cashback on mobile plans and gift vouchers from group firms, upping the ante for rivals again.

Still, there’s no arguing with the wave of consolidation that’s hit the sector.

Bharti said it will buy Tata Group’s mobile-phone business in October, months after agreeing to acquire Telenor ASA’s local operations. Vodafone and Idea are merging their Indian operations to create the nation’s largest carrier. Reliance Communications Ltd. will be scaling back its 2G and 3G wireless operations from end-November.

“Consolidation in the telecom sector, which was long awaited, is finally happening and it should bring benefits to the companies,” said Sohini Andani, a Mumbai-based fund manager who oversees more than $3 billion at SBI Funds Management and doesn’t hold telecom stocks in her portfolios. “A lot of fringe players getting out and larger players merging with each other, is good for the business.”

©2017 Bloomberg L.P.