India’s mobile-phone companies are paying a record 1.1 trillion rupees ($18 billion) to keep their networks running. It’s money well spent, if the stock market is any guide.

The MSCI India Telecom Services Index has rallied 14 percent from this year’s low on March 9, the only gain among 10 industries, after losing 67 percent in the preceding decade. Local funds have increased holdings to the highest in 11 months, while BNP Paribas Asset Management’s top-performing Indian stock fund is bullish on the industry.

Bharti Airtel and Idea Cellular are rallying on optimism the expense of securing spectrum for 20 years will pay off as the world’s second-largest wireless market grows. Net incomes at the two companies have climbed at least seven times faster than the broader market over the past six quarters as smartphones costing less than $200 spur a jump in mobile-data use.

“In this desert of no earnings growth, telecom companies are the only ones whose profits are growing,” Anand Shah, the chief investment officer at BNP Paribas Asset Management India, which has $2.1 billion under management and advisory, said in an interview in Mumbai on April 29. “We’ve just scratched the surface as far as data is concerned.”

Sensex retreat

Money managers have been piling into telecom companies amid a weakening outlook for other industries. The S&P BSE Sensex, one of Asia’s best performing stock indexes in 2014, tumbled to a six-month low on Thursday amid growing concern about Prime Minister Narendra Modi’s ability to push through economic reforms.

Spending on the wireless spectrum was 68 percent higher than the base price set by the government, according to auction results released March 26. Bharti, Idea and the UK’s Vodafone Group Plc retained airwaves that were up for renewal while also gaining spectrum that enables them to boost fourth-generation offerings.

“Your costs are fixed for the next 20 years even as the market continues to grow,’” Ajay Srivastava, a managing director at Dimensions Consulting, said by phone from Gurgaon, near New Delhi. “The industry is an oligopoly and the players have realized the Indian market is big enough to be shared among the three or four players.”

Reliance Jio

Competition from billionaire Mukesh Ambani’s upstart operator Reliance Jio Infocomm may complicate the ability of carriers to raise rates in a market where calls cost less than one cent a minute, according to Birla Sun Life Asset Management.

Reliance Jio, set to start service later this year, has been buying airwaves since 2010.

“We’re not positive on the sector,” Mahesh Patil, the co-chief investment officer at Birla Sun Life, which has $17.5 billion in assets, said in an interview in Mumbai.

Smartphone apps that allow free messaging and voice calls also threaten to eat into carriers’ revenue from traditional calls and texts, according to Kotak Institutional Equities.

“We have no clue of the distraction that could come in the form of technology,” Sanjeev Prasad, the Singapore-based co-head and senior executive director at Kotak, said in an interview with Bloomberg TV on April 15.

The BNP Paribas Equity Fund, which held 16 percent of its assets in Bharti and Idea on March 31, has beaten 87 percent of its peers since Jan. 1, with a 3.2 percent gain, data compiled by Bloomberg show. The fund has returned 44 percent in the past 12 months. Local funds held 1.8 percent of their assets in phone companies at the end of March, the most since April 2014, data from the market regulator show.

Greater Internet access and rising smartphone ownership make the carriers a proxy for India’s consumer market, Dimensions’ Srivastava said. Data revenue for Bharti and Idea will grow at least 40 percent annually through March 2017, Mumbai-based brokerage ICICIdirect said in a April 30 report.

“The telecom industry has a terrific matrix emerging,” Srivastava said. “Buy, close your eyes and just keep it.”

Bloomberg

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Indian Prime Minister Narendra Modi gestures while speaking to a crowd during a public meeting, as part of the National Executive meeting in Bangalore, India on April 3, 2015. (EPA Photo/Jagadeesh Nv)

Indian stock investors’ year-long infatuation with Prime Minister Narendra Modi is coming to an end.

After surging about 40 percent in the 12 months through February, the benchmark S&P BSE Sensex index sank 4.8 percent in March for its biggest retreat in 25 months. Strategists are cutting forecasts for the equity gauge for the first time in six quarters, while estimates for fiscal 2016 earnings have dropped by 4.7 percent since the end of December.

With shares in Asia’s fourth-biggest stock market trading near the most expensive levels since 2010, investors are looking for more evidence that Modi’s efforts to propel growth will lead to a revival in corporate profitability. While the Bharatiya Janata Party leader has cut bureaucracy and boosted infrastructure spending since taking power in May, opposition politicians have hampered his ability to push through permanent measures designed to attract foreign capital and spur economic expansion.

“The market is in a precarious position,” said Rakesh Arora, the head of research at Macquarie Capital Securities India, whose Sensex forecasts were the most accurate in Bloomberg surveys over the past two years. “While India continues to remain an attractive market from a two-to-three-year perspective, there seems to be growing restlessness around the timing, or lack thereof, of policy execution and earnings delivery.”

Sensex target

Mumbai-based Arora trimmed his year-end Sensex target by 4 percent from three months ago to 31,600 as he pared his profit growth projection. That compares with an average estimate of 32,640 in a Bloomberg survey of nine strategists, a 1.9 percent decline since January. The index rose 0.9 percent to 28,504.46 on Monday.

The Sensex trades at about 16 times estimated earnings for the next 12 months, within 5 percent of a four-year high on March 3. The gauge is valued at 30 percent premium over the MSCI Emerging Markets Index, data compiled by Bloomberg show.

Investors’ waning enthusiasm for Indian stocks contrasts with bullish views toward the nation’s bond market, with global investors pouring a record $26.9 billion into rupee-denominated debt in the fiscal year ended March 31. Central bank Governor Raghuram Rajan, who decides on interest rates Tuesday, has cut borrowing costs twice this year as a slump in energy prices helped cool inflation.

India story

Despite the reduced outlook for earnings and stock-market returns, analysts in India are still more bullish than many of their emerging-market peers.

Their forecast for fiscal 2016 earnings still amounts to a 26 percent gain from current levels. Profits in the MSCI emerging markets index are projected to increase about 8.7 percent. The Sensex would climb to a record high if it matches strategists’ average year-end target.

“There’s still a lot of confidence in the India story,” Adrian Mowat, the chief Asian and emerging-market equity strategist at JPMorgan Chase in Hong Kong, said in an interview with Bloomberg TV India on March 31. “We have accelerating growth, prospects of lower interest rates and good quality companies.”

So far, the earnings recovery has failed to materialize. Sensex profits in the three months ended December fell for the first time in six quarters.

Oil slump

That’s partly due to the deteriorating outlook for commodity-related companies after oil and metals prices slumped, according to ICICI Prudential Asset Management, which oversees $22 billion as India’s second-biggest money manager. Metal and oil companies have a combined 13 percent weighting on the Sensex, and contributed about 40 percent of the gauge’s earnings in the December quarter, the data show.

“Everyone dislikes the word inflation, but inflation adds to corporate profitability,” S. Naren, the fund’s chief investment officer, said in Mumbai on March 25. “We are not bullish on earnings improving in the next one or two quarters.”

Meanwhile, Modi has faced challenges in gathering the support needed to push through economic reforms. The BJP won only three of 70 seats in Delhi elections in February, its first electoral setback since Modi took power.

The defeat has added pressure on Modi as he seeks to push laws through the upper house of parliament, where the BJP lacks a majority. One of the key pending bills would make it easier for companies to buy property, among the biggest hurdles to investing in India.

Modi has so far used his executive powers to temporarily enable states to acquire land, and needs a majority in the upper house to make it permanent.

Investors who “enthusiastically” bought into local stocks in the last 12 to 18 months are now anxious, Saurabh Mukherjea, the head of institutional equities at Ambit Capital in Mumbai, said in an interview with Bloomberg TV India on March 31. “The earnings growth pickup, the GDP growth pickup isn’t quite there.”

Bloomberg

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