Should you buy telco stocks as enterprise services emerge as a new frontier?

Digital transformation has gathered an unprecedented pace amid the pandemic, enterprise services have emerged as the new value engine for telecom services providers. Corporates are now moving away from the conventional hub and spoke model and fast adopting cloud solutions which run on internet WAN (wide area network), are challenging.

“Enterprise services are emerging as a new value engine for telcos amid rising demand for services in the wake of digital transformation,” said ICICI Securities in a report.

However, this is also pushing telcos to re-innovate and broaden their service offerings by expanding into platform or software services. The market for traditional services (voice and data) are declining, but the larger markets are opening up to cloud and managed services, such as security, edge computing, unified communications, among others, noted the report.

The ICT (information and communications technology) stack

Telcos have been perceived as a utility providing cost-efficient bandwidth to customers. Smart telcos have bandwidth economics, but they also know other requirements of clients. These telcos are developing products and services including middle-level capabilities to enable services over the network infrastructure. They also orchestrate the ecosystem of other service providers leveraging their reach, analytics and infrastructure capabilities.

This throws business opportunities at the middle layer between connectivity and the service layer. This layer includes key enablers for device management, security, analytics, and scalable computing infrastructure and platforms.

Top picks

Keeping the ICT stack in mind ICICI Securities evaluated the capabilities of India enterprise telcos on evolving telco business model, and how each telco can be imprinted on enterprise service provider requirements; and digital transformation scale. Basis it the brokerage firm is gung-ho on Tata Communications & Railtel.

Tata Communications | Price target: Rs 1,461 | Upside: 18%

Tata Communication has been working on transforming into a global digital solutions provider from a ‘data pipe’. It has taken huge efforts and time to reach the inflection point. New CEO and CFO come from a software background, which shows the board’s intent, and are likely to catalyse the creation of a ‘solution mindset’. Tata Communication is also engaging with sister concern TCS (Tata Consultancy Services) to fast expand its reach, which should add to growth. FY21 was a dud year on the revenue front but should recover in the near future. EBITDA (earnings before interest tax depreciation & amortization) growth at a CAGR (compounded annual growth rate) of 14% and EPS (earnings per share) growth at 36%, over FY21-FY23E, on a low base and financial leverage.

Railtel Corporation of India | Price target: Rs 160 | Upside: 16%

Railtel Corporation (Railtel) is well-positioned to benefit from the digital transformation programme initiated by the government of India including Indian Railways, which significantly increases visibility on its earnings growth over the next decade. The company’s order book is very healthy at Rs 44,000 crore, which should help it grow both telecom services and project business.

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