Billionaire Telecom Dogfight Seen Offering Best Returns in IndiaRajhkumar K Shaaw and Siddharth Philip
Jio to ‘force 4G adoption’ for telecom industry: BNP Paribas
Demographic trends to benefit sector growth: ICICI Prudential
Bharti Airtel Ltd. and Idea Cellular Ltd. have the best return potential among India’s biggest companies even after rival Reliance Jio Infocomm Ltd. stormed the phone market this month with free calls.
The shares of the wireless carriers are set to rally an average 23 percent in the next 12 months, according to analyst estimates compiled by Bloomberg. The spread between their target prices and current values is the most among companies in the NSE Nifty 50 Index, the data show.
Bharti and Idea have lost a combined $1 billion in market value this month on concern billionaire Mukesh Ambani’s Jio offering will pressure existing carriers to follow suit in a market where calls cost less than 2 cents a minute. About half the 38 analysts tracking the carriers have a buy recommendation on the shares, data compiled by Bloomberg show.
“You can make money when there’s uncertainty and telecom is where there is maximum uncertainty right now,” S. Naren, executive director and chief investment officer at ICICI Prudential Asset Management Co., India’s largest money manager with $29 billion in assets, said in an interview in Mumbai. “We see value in the sector.”
Naren’s funds held a total 41.74 million shares of Bharti, or 1 percent of the company’s equity, as of Aug. 31, data complied by Bloomberg show.
The phone companies’ valuations have contracted in recent months as they braced for the entry of Jio as a new competitor. Bharti trades at 23.8 times reported earnings, compared with a multiple of 28 in July, which was the highest in a year. Idea is valued at 12.8 times, down from about 17 two months ago, the data show.
Jio’s service, which began Sept. 5, is free until December. Subscribers will subsequently pay as little as 149 rupees ($2.2) a month for data. Bharti Airtel, Idea and Vodafone Group Plc’s unlisted Indian unit have cut data tariffs by as much as 67 percent to retain customers. The operators together control two-thirds of India’s mobile market by users.
“A new player spoils the party at the lower end; you can never attack market leaders initially,” said Anand Shah, the chief investment officer at Mumbai-based BNP Paribas Asset Management India, which has $2 billion under management and advisory. “Jio is more fear than actual disruption. There’s a lot of inertia to change” service providers, he said.
The BNP Paribas Equity Fund had 10 percent of its assets in Bharti and Idea at the end of August. Bharti jumped 1.6 percent to 327 rupees at the close in Mumbai, the most in three weeks. Idea fell 1.3 percent after climbing 0.7 percent on Wednesday.
Competition could hinder bidding for airwaves by incumbents in next month’s 5.6-trillion rupee ($83 billion) government auction of airwaves as operators preserve cash to service loans and ward off Jio. India’s 12 wireless operators have more than $61 billion in debt, according to ICRA Ltd., a unit of Moody’s Investors Service.
“Spectrum is the immediate raw material for telecom companies and without it you cannot grow the business,” said Gopikrishna Shenoy, chief investment officer at SBI Life Insurance Co., the nation’s second-biggest private insurer with $13 billion in assets. “We’re never certain as to what price that raw material will come. That uncertainty bothers us.”
Fund managers are betting the cost of securing airwaves will pay off as greater Internet access expands mobile-data usage in the world’s second-largest smartphone market. Almost 90 percent of 151 million broadband users access the Internet via mobile devices, according to the telecom regulator.
‘4G Heavy Lifting’
Reliance Jio’s fourth-generation only service is doing “the heavy lifting” for adoption of the technology in the country, BNP Paribas’ Shah said.
“Even though data prices have come down, the number of devices and consumption has grown exponentially,” Shah said. “Data is one of the biggest consumer stories in India.”
Jio plans to draw 100 million users and expects data usage to reach 2.5 billion gigabytes a month on the network, Ambani told shareholders of his Reliance Industries Ltd. on Sept. 1. Jio had 1.5 million customers in its beta tests, Anshuman Thakur, the company’s head of strategy, told reporters July 15.
“The market cap of telecom companies in the developed countries is many times that of Indian companies,” ICICI Prudential’s Naren said. “Our demographic profile is favorable for the sector’s growth as compared to developed economies. The telecom sector could give you the opportunity to make money over the long term.”