Both poster boys of the Indian infrastructure story, power and telecom sectors have had more than one thing in common. While their necessity and growth potential has been cemented by growth in India's population and her economic prosperity, regulations have been the biggest hurdle. Both have enjoyed a handsome share of the government's infrastructure investment allocation in the past decade. Both have witnessed a larger number of private sector as well as foreign players eyeing a pie of the market. However, if one looks at the growth trend the two sectors seem to be quite different from each other.
India has experienced a revolution in its telecommunications infrastructure over the last five years. Billions of dollars of investment in cellular networks has brought phone service to millions of Indians who never had phones. Telecom may be the only sector where in certain cases execution has been ahead of plans. The major telecom players in the country for instance have added subscribers at a faster rate than anticipated. Despite shortage of bandwidth, this sector has added more revenues to the government exchequer through license fees than expected. However, in recent years, the Indian telecom sector has shown signs of maturity in terms of growth and profitability.
The person at the helm of private sector infrastructure financing in India has a very interesting opinion. In an interview to Wall Street Journal, Mr. Rajiv Lall, the MD of IDFC which finances nearly a fifth of PPP projects in the country, said "Power is the new telecom". Mr. Lall believes that the power generation industry in India has at last reached a tipping point. He believes that with better government regulations, smart financing and private participation, the sector can bring in plenty of new generation capacity to the subcontinent. Mr. Lall estimates US$ 20 bn a year will be spent on new power plants over the next four years, adding at least 30% to India's power generating capacity.
For investors this is an important takeaway in terms of getting a hint of the new growth areas. While the focus on power sector in the government's 5-year plans has been amply documented, the sector is set to outdo on several fundamental parameters.
If one looks at the recent trend in sales and profit growth, Tata Power (the country's largest private sector power company) has managed to surpass the growth in Bharti Airtel's (the largest private telecom company) profits in recent past. While this may be ignored as a temporary phenomenon, the odds are weighed against the telecom sector.
Data source: CMIE, Equitymaster
While the growth in demand for power is indubitable, deregulation of power tariffs could be the tipping point that could improve the returns for investors in the sector. Having said that investors need to adopt a bottom-up approach to invest in the best plays in each of these sectors.