India's Telecom Bill 2023 Promises a New Regime: A Boon or Bust for Investors?

On 21 December 2023, the Rajya Sabha approved the Telecom Bill 2023, marking a significant shift in the regulation of India's telecommunications industry.

This new legislation aims to simplify the authorization process, doing away with the intricate licensing system that was in place.

The Indian Telegraph Act of 1885 and the Indian Wireless Telegraphy Act of 1933, which governed the telecom industry in India, were deemed inadequate for addressing technological advancements.

The Telecom Bill of 2023, replacing both acts, aims to modernize and streamline the telecommunications landscape in the country.

At present, telecom service providers have to procure different licenses, permissions, approvals, and registrations for different services. The Department of Telecom issues over 100 such licenses or registrations, leading to a complex and burdensome process.

A crucial aspect of the bill is to subsume all of this. It aims to eliminate procedural opaqueness, bureaucratic discretion and overlapping authorities.

Under the provisions of the bill, the government will shift from auctioning the satellite broadband spectrum to allocating it, thus establishing a more adaptable and scalable regulatory framework.

"As the Bill ushers in simplification in telecom licensing regime, carrying on the intent of reforms started in September 2021, the Bill will bring predictability in crucial areas related to spectrum such as harmonisation, surrender of unused spectrum, primary and secondary assignments among others," Gopal Vittal, Chief Executive Officer, Airtel, said.

In 2021, spectrum reforms removed charges for future spectrum assignments, offered a moratorium on past spectrum dues, and introduced an annual spectrum roadmap. These reforms are gaining traction with the Telecom Bill of 2023.

The amendments in the new bill will help the country and the telecom players within to align themselves with international standards, fostering international collaboration, and driving innovation in the sector after several years.

The recently introduced bill is touted as a significant boon for the industry, presenting investors with a chance to participate in the transformative journey of the telecom sector.

India is the second-largest telecommunications market in the world, with over 1.15 bn subscribers.

However, the financial health of a majority of telecom companies in the country remains suboptimal.

Close rivals Reliance Jio and Bharti Airtel hold a commanding 78% share and a subscriber base of 800 million in India's mobile market.

Reliance Jio, an unlisted player, boasts extensive market dominance with a higher subscriber count of 460 m. However, Bharti Airtel leads the industry with the highest average revenue per user.

Both competitors have reported a compound annual growth rate (CAGR) of 18-19% in mobile revenue from FY20 to FY23. Interestingly, Bharti India's YoY growth of 12-17% in the initial half of FY 2024 surpassed that of Reliance Jio.

Bharti Airtel's balance sheet is debt-laden, with a total debt to equity of 2x in FY 2023. But the company has managed to survive the hardship.

Bharti Airtel Financial Snapshot (2019-23)

	2019-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	-0.70%	3.15%	17.45%	15.63%	19.64%
Operating Profit Margin (%)	33.37%	42.27%	45.73%	49.82%	51.90%
Net Profit Margin (%)	2.09%	-39.70%	-23.28%	7.13%	8.83%
Return on Capital Employed(%)	4.77%	-16.57%	0.31%	14.99%	16.21%
Debt to Equity	1.69	1.53	2.2	2	2.14

Data Source: Ace Equity

Vodafone Idea has faced severe setbacks by advancing aggressive players like Reliance Jio.

It has been losing market share to Bharti Airtel and Reliance Jio for over five years. The company has been struggling operationally and financially, marked by persistent rating downgrades from reputable agencies. This has resulted in increased financing costs, further hampering profitability.

Vodafone Idea Financial Snapshot (2019-23)

	2019-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	10.81%	-9.07%	-28.03%	-22.01%	9.26%
Operating Profit Margin (%)	72.98%	68.04%	63.27%	43.93%	46.40%
Net Profit Margin (%)	0.66%	0.74%	9.37%	105.31%	15.04%
Return on Capital Employed(%)	10.73%	8.30%	2.24%	25.38%	4.57%
Debt to Equity	NA	NA	NA	NA	NA

Data Source: Ace Equity

In a significant development earlier this year, the government acquired a 33.1% stake in Vodafone India. This acquisition transpired when the telecom department converted the company's accrued interest on deferred adjusted gross revenue (AGR) dues, totaling Rs 161 bn, into equity.

RailTel Financial Snapshot (2019-23)

	2019-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	0.70%	12.51%	20.99%	11.79%	27.02%
Operating Profit Margin (%)	33.64%	33.18%	26.36%	25.81%	21.55%
Net Profit Margin (%)	11.12%	12.51%	10.34%	13.49%	9.63%
Return on Capital Employed(%)	14.90%	14.60%	14.65%	19.70%	16.81%
Debt to Equity	-	-	-	-	-

Data Source: Ace Equity

Reaping benefits from the transition in the sector are indirect beneficiaries, RailTel Corporation and Indus Tower. RailTel, one of the largest telecom infrastructure providers in the country is also a beneficiary.

The government-owned entity boasts a healthy debt free balance sheet and has performed exceedingly well. It enjoys the highest net profit margin among key telecom companies in India and the highest operating margin among key IT/ICT companies in India.

Indus Towers, one of the largest digital communications infrastructure providers in the world caters to Bharti Airtel, Vodafone Idea, and Reliance Jio. The company enjoys a nationwide presence, with its extensive network of towers, covering all 22 telecom circles.

It's well-poised to benefit from the boost in the telecom sector. Over the past three years, Indus Towers has shown a consistent revenue growth of 28% and maintained a healthy profit growth of 11.4%.

Indus Towes Financial Snapshot (2019-23)

	2019-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	5.07%	-3.39%	99.71%	96.52%	2.36%
Operating Profit Margin (%)	53.53%	59.67%	54.29%	55.41%	36.10%
Net Profit Margin (%)	36.53%	48.92%	27.08%	22.99%	7.19%
Return on Capital Employed(%)	22.89%	27.03%	27.97%	38.83%	16.57%
Debt to Equity	0	0.18	0.51	0.25	0.22

Data Source: Ace Equity

A Rising Tide Lifts All Boats

Despite weak balance sheets, top telecom stocks have moved up since the beginning of the year, surpassing the BSE Sensex.

The stock of Bharti Airtel is up 25%, whereas Vodafone India has jumped 68% since the beginning of the year. RailTel India has outperformed its peers substantially reporting a 102% growth.

On the flip side, Indus Towers has underperformed massively, falling by over 7%. The benchmark BSE Sensex has gained only 18% during the same period.

This market upswing has led to increased valuations. Vodafone India is trading at a 17.9 EV/EBDITA, a 2x premium to its 5-year median of 9.3. Bharti Airtel is trading at 9.7 times, in line with its historical median.

While Indus Towers is trading at a PE of 13.9 times, in line with its 5-year median of 14 times, RailTel is trading at 50.7 times, a premium to its historical median PE.

In conclusion

The Indian telecom sector is undergoing a major transformation, driven by the recent Telecom Bill and fueled by investor optimism.

While the potential for growth and profitability is undeniable, there are also underlying risks and challenges to consider.

Investors should carefully analyze individual companies, their financial health, and long-term prospects before diving into this dynamic market.

Remember, even a rising tide may not lift all ships equally, so tread with caution and make informed decisions to navigate this wave of change.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...