Why equity-happy FPIs are calling off investments in telecom stocks

Despite pumping in record investment into Indian equities, foreign portfolio investors (FPIs), known for taking long-term structural bets, have been scaling down their investments in telecom stocks since the beginning of the current fiscal.

According to depositories data, the telecom sector was the highest loser of FPI funds in the equity segment as on date in the current fiscal, with a net outflow of ₹8,542 crore between April 1 and December 15. Foreign investors have been net sellers in the sector in seven out of nine months of FY21.

In contrast, the overall FPI inflow into Indian equities is hovering at historically high levels.

Business boom

The foreign fund outflow from the telecom sector comes at a time when major telcos are witnessing a surge in their active subscriber base and substantial jump in data consumption, accelerated by the pandemic.

“From the business perspective, it has been a great year for the telecom industry, as it saw a rise in active subscribers, a positive move in pricing and higher data usage,” said Ajit Mishra, V-P Research, Religare Broking.

“However, the outflows in the telecom sector can be largely attributed to MSCI and FTSE rebalancing, which led the FIIs to sell a stake in Bharti Airtel. And, given the consistent market share loss, FIIs continued to reduce their stake in debt-ridden Vodafone Idea,” he added.

According to the latest monthly subscription data released by the Telecom Regulatory Authority of India (TRAI), the industry’s active subscriber base rose by 25 lakh in October 2020 to touch 96.1 crore.

Active subscriber base

While RJio's active subscriber base rose by 11 lakh to 31.9 crore, rival Bharti Airtel added 30 lakh users to take its active subscriber base to 32 crore. The cash-starved Vodafone Idea’s active subscriber base fell by 12 lakh during the month to close at 26 crore.

Vodafone Idea, now re-branded as Vi, has been rapidly losing its market share as rival operators infuse huge investments in network rollouts and upgrades.

“Vodafone Idea is rapidly losing market share given its weak balance sheet and limited financial flexibility. We believe it could lose 50-70 million subscribers in the next 12 months, after losing about 155 million subscribers in the last nine quarters,” Fitch Ratings said in a recent report.

FPIs have been trimming their exposure to this sector over the last few quarters. For instance, FPI holding in Vi dropped to 6.20 per cent as of September 2020 from 14.60 per cent in the year-ago period. In Bharti Airtel, it fell from 22.30 to 17.60 per cent during this period.

Mutual fund holding

While mutual fund’ holding in Vi fell to a mere 0.50 per cent as of Q2 FY21 from 6 per cent in the same quarter last year, their holding in Airtel increased to 14.4 per cent (8.80 per cent).

However, in a year-end note on equity markets, Motilal Oswal said further liquidity flows across emerging markets could remain strong and bode well for Indian markets. “From the next 12 months perspective, we are positive on IT, BFSI, healthcare, telecom, auto and consumer,” it added.