According to National Securities Depository Ltd (NSDL) data, out of the $2.32 billion poured in by foreign portfolio investors in May, about $1.88 billion went into telecom stocks. This is the biggest-ever monthly FPI inflow into India's telecom sector. It's also a steep jump from $523 million in April, signalling rising investor confidence in the space.

One of the main reasons for this influx of capital in the telecom sector could be Singtel selling its 1.2% stake in Bharti Airtel in a block deal in mid-May, on a private placement basis, to international and Indian institutional investors.

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Structural reset

Market participants believe the sector is undergoing a major structural shift, which is putting telecom stocks back on the investor radar.

Average revenue per user (Arpu) has improved significantly post-Covid, said Krishna Appala, senior research analyst at Capitalmind Research. Arpu had dropped below ₹120 by 2018 amid intense price wars.

Now, Bharti Airtel's Arpu is at ₹245 and Reliance Jio's at ₹203, with long-term targets closer to ₹300. The market has consolidated, and while Vodafone Idea retains about 18% share, its share continues to face steady pressure from the other two stronger players, he said.

The sector is experiencing a growing subscriber base and a rise in data usage, with 5G monetization opening up an incremental revenue stream for players, experts said.

There is abroad consensus among market participants that the wireless industry is on a growth path, driven by a consolidation in the telecom space and a steady stream of tariff hikes over the past few years.

“Since the average price of mobile data in India remains one of the lowest in the world, we see further scope of tariff increase going ahead and that gives confidence about the outlook of the telecom sector," said Piyush Pandey, research analyst at Centrum Broking.

Besides the wireless segment, Pandey added that the fixed broadband and B2B segments are also witnessing strong momentum in revenue growth.

For now, Pandey finds Bharti Airtel and Indus Towers attractive in terms of business outlook.

Centrum has a ‘buy’ rating on Bharti Airtel and Indus Towers and a ‘reduce’ recommendation on Tata Communications and Vodafone Idea.

However, capital expenditure intensity in the telecom sector is falling sharply, said Krishna Appala, senior research analyst at Capitalmind Research. He pointed out that telecom operators had spent heavily on 5G rollout over the last two years – nearly ₹80,000 crore cumulatively in FY24.

“But in FY25, we expect capex to decline 15-20%. The capex-to-revenue ratio, which peaked at 30-45%, is now coming down to around 18-25%. It suggests companies are finally set to see returns on their heavy capex investments," Appala said.

While Airtel has industry-leading Arpu with strong focus on execution, Indus Towers is a potential beneficiary of increase in capex by Vodafone Idea Ltd. Meanwhile, Tata Communication is focussed on B2B telecom segment, he pointed out.

Also Read: When homegrown capital outgrows foreign funds: Can India fund its own growth?

Mutual funds warm up

Recent trends also suggest that the telecom services and equipment space could see buying interest from domestic mutual funds once they begin deploying capital, experts said.

In May, mutual funds bought ₹5,768.7 crore worth of telecom stocks, with Bharti Airtel, Indus Towers, Vodafone Idea, Tata Communications, and Railtel Corp. being the top picks, JM Financial data showed. In April, mutual funds sold telecom services stocks worth ₹2,852.2 crore.

The report pointed out that telecom makes up 4% of the BSE 200 index, but mutual funds are still trailing that mark, holding 1.1% less than the benchmark.

JM Financial has a ‘buy’ rating on Bharti Airtel's stock and a ‘hold’ recommendation on Vodafone Idea.

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Signs of rotation

Even as the benchmark Nifty 50 declined 1.2% over the past month, several telecom-linked stocks have outperformed. Bharti Hexacom gained 7%, Railtel rose 11%, GTL Infrastructure surged 26%, Sterlite Technologies jumped 10%, Avantel soared 32%, and Vindhya Telelinks was up 8%.

Pure telecom plays, however, were muted: Bharti Airtel edged up 2.4%, Reliance Industries dipped 1.3%, and Vodafone Idea slipped 10%.

Yet, for long-term investors, the story could be just beginning. “Given the sector's critical role in shaping India's digital future, telecom stocks remain essential for a growth-oriented portfolio," said Vipul Bhowar, senior director, head of equities, at Waterfield Advisors.

India's National Telecom Policy 2025 aims to double telecom product exports and attract ₹1.5 trillion ($18 billion) annually in telecom infrastructure investments by 2030. Additionally, the Telecom Act 2023—slated for full rollout by mid-2025—aims to simplify licensing, reduce compliance burdens, and foster participation from startups and SMEs, he explained.

Bhowar also noted the government’s plan to integrate terrestrial and satellite networks, which would open the door for foreign players like Jio-SES, Airtel’s Eutelsat OneWeb, and Starlink, would reshape the telecom landscape.

Not without challenges

However, there are hurdles. Only a handful of companies in the telecom space can absorb large amounts of capital, according to Vivekanand Subbaraman, lead analyst at Ambit Capital.

He pointed out that in 2020, most of the telecom fundraises came from the Reliance group. Since then, Reliance has not done much, while the Bharti group has actively raised capital, not just to fund business growth, but also through secondary transactions where early investors recycle their capital.

“Ultimately, the real investment opportunities are still concentrated in a few large players where capital keeps getting recycled," he remarked.

Subbaraman sees potential beyond the core telecom players in the ancillary space, including tower companies and telecom equipment makers. Some of the players in the ancillary space include tower companies and telecom equipment makers like Indus Towers, Tejas Networks, HFCL, among others.

However, he cautioned that most of the stocks in this space are thinly traded, and would be less suitable for institutional investors looking to deploy substantial, non-speculative capital with predictable returns.

“That kind of money simply won’t flow into some of these names," he said.

Some market participants also warn that some of these lesser-known telecom-linked stocks may be only short-term plays, trading at valuations that appear stretched. For instance, Optiemus Infracom, with a market capitalization of over ₹5,000 crore, is currently trading at a whopping 199.5 times price to earnings (PE) ratio compared to its five-year average PE ratio of 74.97.