Telecom Sector Analysis Report 

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• The telecom market can be split into three segments - wireline, wireless and internet services. The wireline (fixed) segment consists of companies that provide direct communication through landlines/ whereas the wireless segment comprises of establishments that provide communication through airwaves. Internet services include Internet Service Providers (ISPs) that offer broadband internet connections through consumer and corporate channels.
• The wireless market comprises 98.1% of the total subscriber base. Tariff reduction and decline in handset costs has helped this segment to scale. It has also gained dominance by making itself available in rural areas where the tele-density is far lower.
• India is currently the world's second-largest telecommunications market, having a subscriber base of around 1.2 billion. Owing to rapid expansion taking place in the Indian mobile economy, it is expected to contribute substantially to India's GDP.
• The subscriber base is also widening on account of increasing mobile network coverage and competition-induced tariff reductions. These factors coupled with growing broadband internet access and smartphone proliferation have positively impacted demand. With exponential growth in video consumption, enterprises are also taking a mobile-first approach.
• A surge in the subscriber base has also necessitated network expansion covering a wider area, thereby creating a need for significant investment in telecom infrastructure. Telecom companies have now started segregating their tower assets into separate companies which has provided them an additional revenue stream.
• The Government of India's National Digital Communications Policy 2018 has envisaged attracting investments worth US$ 100 billion in the telecommunications sector by 2022. The policy also envisages to provide universal broadband coverage at 50 megabit per second (Mbps) to every citizen in addition to providing 10 gigabit per second (Gbps) connectivity to all Village Panchayats of India by 2022.
• Foreign Direct Investment (FDI) in the telecom sector has been increased to 100% from 74%. Of this, 49% will be done through automatic route and the rest will be done through the Foreign Investment Promotion Board (FIPB) approval route. FDI up to 100% is also permitted for infrastructure providers offering dark fibre, electronic mail and voice mail.
• The Government has also proposed a joint task force between Ministry of New Renewable Energy (MNRE) and Department of Telecommunication to promote green technology in the sector. The green telecom concept is aimed at reducing carbon footprint of the telecom industry through lower energy consumption.

• Supply
• Low in rural and semi urban areas.
• Demand
• High, given the low tariff environment.
• Barriers to entry
• High, due to complex regulations, high capital investments, licensing fees and continuously evolving technology.
• Bargaining power of suppliers
• Low, as many telecom companies have gone for back ward integration i.e., in house manufacturing of mobile handsets etc. or have collaborations. However, software providers may have a higher bargaining power.
• Bargaining power of customers
• High, due to a wide variety of choices available and poor product/service differentiation. Switching cost is also low.
• Competition
• High. Companies are forced to operate with lower prices due to intense competition. This tends to drive industry profitability down.
• Threat of Substitutes
• Moderate, from products and services from non-traditional telecom industries.
  "Internet telephony" - video conferencing, video chat etc. are becoming popular and Internet Service Providers are taking a big bite out of telecom companies' core voice revenues

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• As of March 2020, the overall tele-density for India stood at 85.9%. Among the areas excluding metros, Himachal Pradesh had the highest tele-density (148.3%) followed by Kerala (128.1%), Punjab (122.8%), Tamil Nadu (108.2%), Gujarat (98.9%), Andhra Pradesh (98.8%), Haryana (97%), Rajasthan (84.5%), and Jammu & Kashmir (84%).
• Among the metros, Delhi had the highest tele-density (280.1%). On the other hand, areas such as Bihar (53.1%), Madhya Pradesh (67.1%), Uttar Pradesh (67.2%), and Assam (68.6%) had a comparatively low tele-density.
• The number of wired broadband subscriptions in FY20 stood at 19 million while the number of wireless broadband subscribers stood at 668 million. Total broadband subscriptions in the country also grew from 150 million in FY16 to 687 million in FY20.
• During FY20, the Indian wireless industry had an eventful and challenging year with continued hyper competition and an adverse verdict on the long pending industry issue of Adjusted Gross Revenue (AGR), further adding to the financial woes of the operators. The recent Supreme Court (SC) ruling put a financial burden of Rs 1470 billion on the telecom players.
• In the second half of FY20, customers also witnessed the first round of pre-paid tariff hike by all operators, after several years of price decline. The pricing action coupled with increasing migration to Unlimited/4G plans has led to improvement in Average Revenue Per User (ARPU), resulting in revenue growth after a sustained period of losses.
• While the industry saw some improvement in the revenue during FY20, the gross revenue is still 9.2% lower compared to FY16, as tariffs continued to be unsustainably low. Compared to FY16, ARPUs were still 21.6% lower as of FY20. This is despite the fact that the consumer gets much more value in terms of unlimited voice and daily data allowances, compared to five years ago.
• While the operational challenges continue, the consolidation of telecom industry presents several opportunities for surviving operators as and when prices revive to levels in line with costs.

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• Tele-density in rural areas remains one of the main areas of growth for telecom players where the tele-density is low.
• Rising income will be a key determinant of demand growth in the telecommunication sector in India, with the emergence of an affluent middle class triggering demand in the mobile and internet segments.
• India's young population, rapid urbanization and growing middleclass is expected to ensure a growing subscriber base in the target demography. It is estimated that 93.3% of India's population is estimated to be aged under 65 years, with 26.3% aged under 15 years. This is driving growth in content consumption through various streaming apps, and the demand for high speed internet is expected to grow by leaps and bounds.
• Despite such a strong broadband subscriber addition, there is still a large headroom for wireless broadband penetration to improve, as it still remains low at 57.7% as of March 2020. The growth in social media usage, rapidly increasing content consumption and many organizations gradually transitioning to 'Work from Home' will continue to drive demand for data.
• DTH operators are likely to benefit from a rising subscriber base and higher market penetration. Innovations in paid TV services, migration from SD to HD boxes have increased consumption of -smart TV's and HD services, offering more opportunities to service operators.
• Increased penetration of affordable devices, combined with cloud computing, analytics and rising consumer expectations is driving the rapid growth of the IOT market. The Indian Government is planning to develop 100 smart city projects, where IoT would play a vital role in development of those cities. Telecom will play a critical role in providing connectivity and solutions in this market.
• In the era of 5G, telecom companies stand to earn 70% of their revenue from core beneficiaries of 5G. Currently, they earn 30% from enterprises. While implementation and rollout of 5G is still some time away, the standards and ecosystem on 5G have already gathered pace with more and more use cases coming into picture.
• The Government of India has introduced Digital India Program where sectors such as healthcare, banking, will be connected through internet providing ample opportunities for growth in the sector.
• Post COVID-19 related lockdown, work from home may become a new normal for many organizations, thus creating opportunities for different telecommunication services across the spectrum- fixed line, broadband, enterprise solutions besides pure mobile connectivity.

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How has the telecom sector performed in the past decade and when is a good time to invest in the sector?

The telecom sector has provided investors healthy returns in certain time periods during the past decade but overall, the performance of the sector has been underwhelming with intense competition within the sector resulting in low return on equity (RoE). However, lately with telecom companies increasing capital expenditure and investing in their networks, prospects of telecom companies are expected to improve.

Since telecom services fall under the essential service category, demand is consistent all-round the year. Therefore, the best time to buy stocks from this sector is when they are trading at attractive valuations.

To know more about the sector's past and ongoing performance, have a look at the performance of the BSE Telecom Index

Where can I find a list of telecom stocks?

The details of listed telecom companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of telecom stocks.

Which telecom stocks were the top performers over the last 5 years?

AGC Networks, Vodafone Idea and Himachal Futuristic were the top performers over the last 5 years in terms of sales growth.

AGC Networks growth can be attributed to its expertise in the telecom & networking related business, its experienced promoters and a strong and diversified client base whereas Vodafone Idea's growth can be attributed to its position as one of the world's largest telecom companies providing a range of services including voice, messaging, data and fixed communications.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do telecom stocks offer?

Telecom companies do not pay dividends as they need to frequently spend on telecom infrastructure and technology upgradation.

Which are the telecom stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

AGC Networks, Himachal Futuristic and Bharti Infratel are the top telecom stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other telecom stocks offer great return on capital employed, you can check out the top telecom stocks offering the best RoCE here.

Which are the best telecom stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

The most commonly used valuation ratios for telecom companies are Average Revenue Per User (ARPU) and the P/E Ratio.

• Average Revenue Per User (ARPU) – It assesses the revenue-generating capabilities at the per-customer level.

• Price to Earnings Ratio (P/E) - It compares the company’s stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

  To find stocks with favorable P/E Ratios, check out our list of telecom stocks according to their P/E Ratios

Resources on the Telecom sector

• Identifying a Telecom stock: Do's and Don'ts
• List of Telecom Stocks
• Telecom Sector: Over The Years
• Telecom Company Quarterly Results

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