Asked to stay home, Indians increase dependence on telcos; Time to dial telecom stocks?

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Published: April 21, 2020 5:29 PM

The coronavirus pandemic is surely about to bring a change in how we think, act and consume. With the encouragement of social-distancing, person-to-person contact is expected to remain less and the dependence on digital tools for communication is bound to increase.

It must be mentioned that Trai on March 29 had asked all the telecom operators to extend the validity of talk-time of their pre-paid subscribers so that they continue to get uninterrupted services.For telcos, revenue cut in terms of international roaming is expected along with a halt in 4G subscriber addition.

The coronavirus pandemic is surely about to bring a change in how we think, act and consume. With the encouragement of social-distancing, person-to-person contact is expected to remain less and the dependence on digital tools for communication is bound to increase. Similarly, Indians are consuming more online content and increasing their data consumption, in turn helping the telecom industry shore up revenues. “Aversion to physical contact is driving the adoption of digital tools, not to mention the need to raise productivity. We expect such changes to spur data demand structurally, thereby increasing the wallet share of telecom services,” said brokerage and research firm Edelweiss in a recent note.

Telcos started the year on a low with the Supreme Court refusing to budge and asking them to pay their adjusted gross revenue (AGR) dues, a financial burden that risked putting them out of business. However, the strong surge in demand and increased tariff has brought some respite to the industry. “Most industries have been hit hard by COVID-19 and the consequent lockdowns, which have restricted movement of people and goods. The restriction on physical movement has translated to greater dependence on telecom services, thereby increasing its value to customers,” Edelweiss said. The story is similar across the globe, with internet traffic increasing globally. 

With the government adding the telecommunication sector to the list of essential services the impact of the coronavirus and the subsequent lockdown on the sector has been reduced significantly. However, revenue cut in terms of international roaming is expected along with a halt in 4G subscriber addition. With this, the brokerage has upgraded Bharti Infratel to ‘buy’ from ‘hold’ and continues to recommend investors to ‘buy’ Bharti Airtel. Vodafone Idea, on the other hand, is not something that Edelweiss is looking to buy.

Bharti Airtel
Target Price: Rs 606

Edelweiss terms the stock as an outperformer in comparison to the sector considering its ability to capitalise on the higher data demand tailwind leveraging its strong balance sheet. With falling crude oil prices, the fear of currency devaluation remain strong. The move could impact Bharti Airtel’s revenue generation from its African arm. “We believe the tariff hike will boost revenue and profitability, but AGR dues would remain an overhang on the stock. At 7.6x FY21E EV/EBITDA, the stock is trading at an attractive valuation,” the note said. Profit for the financial year 2019-20 is expected to take hit on provisions made for AGR dues but a strong bounce-back is expected in the current fiscal year. For the stock to reach the target price it will have to jump 24% from current levels.

Bharti Infratel
Target Price: Rs 235

A 30% correction has pushed Edelweiss to revise its recommendation for the scrip to ‘buy’. Bharti Infratel is expected to stay immune to the current coronavirus pandemic and its strong cash flow makes it an attractive pick. “We have been less optimistic on Infratel’s growth prospects as telecom operators leverage ‘sectorisation’, massive MIMO and small cells to shore up network capacity, for which the company does not have the right products. We are cognisant of its low growth, but believe the current FCF yield of 10% adequately compensates for it,” the report added. Profits are expected to fall in the current fiscal before the start climbing up again the next fiscal. An upside of close to 50% is being expected on Bharti Infratel the current market price.

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