In this article, we will understand the revenue source of Telecom Companies, what are the parameters to analyze this sector, and how can an investor analyze this sector. So, let’s get started!General Business Model of the Telecom Business:
Key Characteristics of Telecom Sector Business:
- Telecom companies earn revenues mainly through selling data plans, voice, SMS, and other mobile-related services. The more the number of active subscribers more the revenues.
- Telecom business also provides other services like fixed broadband, DTH, Enterprise related communication services.
- The major expenses in this business include network operating expenses, access charges, license fees/spectrum charges.
- The profitability of the business is largely dependent on a parameter called (Average revenue per user) ARPU. More the subscribers more will be the revenue and hence the profitability.
Important Parameters for Telecom Sector:
- Capital Intensive Business
- Data packs (GBs) have become the way to sell services
- The highly organized sector with only 3 players of substance in the private sector
- Network Strength is key to growth
- Expansion in new territories requires the regulator's permission
- Highly regulated sector
1) ARPU- Average Revenue Per User:
- This is the revenue earned by the company per customer for mobile business
- For Example, ARPU for Airtel is Rs. 183 currently while for Jio it is Rs. 175. The more the ARPU better it is. Airtel has been aiming for Rs 200 ARPU over the medium term.
2) Churn Rate:
- It is the number of individuals moving out of a telecom operator's network
- Lower the better. For Airtel, it is 3% while for Jio it is 2%. This means that 3% of the total no of subscribers for airtel left the company's network.
3) Market Share:
- Market share represents the percentage of an industry, or a market's total sales, that is earned by a particular company over a specified period. (Market Shares in terms of Wireless Subscribers Base)
- The more the market share the better it is. Airtel’s market share in the wireless telecom industry is 31.63% as of June 22 while for Jio it is 36%.
4) Debt/Equity Ratio:
- It is the ratio of debt to equity
- It depends on company to company and what stage of their lifecycle are they operating in. Generally, it shouldn’t be more than 3.
5) EBITDA Margin %:
- This is the ratio of earnings before interest, depreciation, and taxes (EBITDA) compared to the revenue for the period
- The higher the EBITDA margin, the better it is. For Airtel, the EBITDA margin is 50.6% as of Q1FY23.
6) Return on Capital Employed (ROCE):
- This is calculated by dividing net operating profit by the capital employed in the business
- Higher the ROC, the better it is. It is 13.7% as of FY22 for Airtel.
7) PE Ratio:
Factors that are moats in the sector:
- The ratio of the price compared to the earnings per share
- For Example, The current P/E of Airtel is 87.38. The 5-year median PE for Airtel is 125. The 5-year median PE looks elevated due to high losses for Airtel in FY21 and FY20.
What Should Investors Do?
- Well-known brand name
- Good variety of products: both for B2B as well as B2C services
- Good geographical distribution all over the country
- Sticky Customers: Especially B2B services (because of data & privacy issues)
- Using digitalization for a better customer experience
- Healthy balance sheet comprising of low debt-to-equity ratio and high-interest coverage ratio
- Good network strength throughout the operating circles
- High entry barriers because of being highly capital-intensive and highly regulated sector
The above-discussed parameters of the Telecom Sector are some key factors that an investor should carefully consider before making an investment decision in any telecom stock. Follow due diligence before making any investment decisions.