Growth Potential Calling: A Look at India’s Telecom Industry

Nick Niziolek, CFA; Paul Ryndak, CFA; and Michael Burke, CFA

In our global and international portfolios, including the Calamos Evolving World Growth Fund (CNWIX), we utilize many levers—both top-down and bottom-up—as we seek to enhance returns and mitigate risks. Our identification of secular themes is an especially important part of our process. Companies that are beneficiaries of secular themes—such as demand for connectivity, the growth of the middle class consumer and global payment ecosystems—may be more resilient during periods of economic turmoil. But selecting the best investments involves more than simply identifying growth themes. Conditions vary greatly among countries, so we invest considerable time to understand how country-specific factors (such as demographics, regulations, or technology penetration rates) influence growth potential. In today’s post, we take a look at the opportunity we’re seeing in India’s telecom sector to illustrate CNWIX’s process in action.

Global firms, including western technology companies, have shown tremendous interest in Indian telecom providers over recent months. In April, a U.S. tech and social media behemoth invested $5.7 billion in India’s largest telecom provider, Reliance Jio. Since then, several private equity firms and a Saudi sovereign wealth fund have followed, investing a combined $9 billion into Reliance Jio. Meanwhile, there are also reports that two other U.S. mega-cap tech/ecommerce leaders are in talks to purchase minority stakes in India’s second and third largest telecommunication providers.

This global interest reflects a massive and unique combination of growth drivers that India’s telecomm providers enjoy. The regulatory environment is one factor: Indian law requires foreign e-commerce companies to sell third-party inventory held by Indian brick-and-mortar stores. This means that large western companies that don’t already have a significant offline presence in India are at a relative disadvantage to Indian retailers and Reliance’s large network of retail stores as they look to expand their e-commerce offerings. And with an estimated population of nearly 1.4 billion, India offers a huge opportunity for businesses to sell products and services to consumers who increasingly have more money to spend.

One of the best ways to reach the wallets of India’s consumers is through the country’s 1.2 billion wireless phone subscribers. This is because there is a significant imbalance between wireless infrastructure and fixed-line infrastructure in India, where the country lags other developing countries. India has one of the lowest fixed broadband penetration rates globally (estimated at just 10%). Internet penetration levels are also low, at an estimated 40% of the population. However, India has a relatively robust wireless infrastructure that includes 3G and 4G coverage. 4G subscribers in India have increased threefold in the past three years, and we see plenty of runway for an additional 4G ramp up. Smartphone penetration in India is still relatively low but climbing, and now accounts for 55% of total phone shipments in the country. This in itself is a future growth opportunity, as it is still much lower than other developing countries. (In China, the smartphone penetration rate is over 80%.) We would expect smartphone penetration to continue to increase as more Indian consumers seek out 4G.  

At 12 GB of data traffic per smartphone per month, India’s data consumption ranks among the top countries in the world. This consumption should rise with increasing numbers of 4G subscribers. As we’ve seen with a number of other global trends, Covid-19 has accelerated this demand in India as well. Telecom data traffic is up more than 50% since Covid-19 began due to higher media content consumption and e-commerce activity.

So, to recap, India’s telecom sector is positioned to benefit from a highly specific set of drivers, including regulations, demographics, data usage, and the balance between wireless subscriptions and fixed-line infrastructure. However, just because a company is tied to a theme doesn’t mean it will be successful, and our investment process also factors in comprehensive company analysis, including business strategy.

Returning to Reliance Jio as an example, we see many compelling company-specific factors. The company is working to create its own online platform that would allow for the bundling of telecom service, retail, payments, media and entertainment content. This bundled ecosystem would be similar to what China’s ecommerce giant Alibaba developed in China. Alibaba drove new retail initiatives by combining online and offline assets, and leveraged data and technology to transform traditional retail and modernize a network of millions of mom-and-pop stores. Over time, Alibaba expanded its ecosystem of products and service offerings further into B2B offerings, then B2C and eventually to C2C. As it grew, it capitalized on economies of scale, which then could be passed along to customers by way of higher quality products/services at lower prices by way of bundling the ecosystems offerings. If Reliance can mirror some of this success in a similar strategy focused on the massive Indian market, the growth opportunities could be impressive indeed.

Conclusion

India’s telecom providers are positioned to benefit from a unique confluence of conditions. India is one of largest and fastest-growing economies in the world, and as smartphone penetration and 4G subscribers rise and more platforms and apps become available, we expect large increases in online spending in India. Reliance Jio and companies like it are well positioned to play an active role in this growth.