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Daily Voice | Telecom sees strong shift in free cash flow generation capability, says this deputy chief investment officer

Despite the upcoming investments in 5G, the sector is witnessing a strong shift in its FCF generation capability that could translate into healthy deleveraging.

November 17, 2022 / 11:30 AM IST
Sumit Jain of ASK Investment Managers

Sumit Jain of ASK Investment Managers


"We are positive on the telecom space in general. We believe that despite the upcoming investments in 5G, the sector is witnessing a strong shift in its free cash flow generation capability that could translate into healthy deleveraging," Sumit Jain of ASK Investment Managers with over 16 years of experience in Indian equity markets says in an interview to Moneycontrol.

He feels industry dynamics are turning favourable with multiple levers of growth for the sector including shift toward 4G/5G, tariff hikes, and market share gains.

On the RBI role going ahead, the Deputy Chief Investment Officer at ASK Investment Managers says given the sticky nature of inflation so far, the RBI may continue its interest rate hiking cycle for now.

Further, the RBI action may be more data dependent and they will continue to monitor the inflation trajectory to take incremental actions, says Jain, who manages the Indian Entrepreneur Portfolio with total assets of over $2.5 billion. Excerpts:

Do you think one should still stay away from new-age tech companies, listed since last calendar year, given the negative profitability?

Markets don't differentiate between new age or old-age businesses. It’s the character of the business, the longevity of its cash flow, and growth thereof that determines the value and the value creation. It is not about near-term cash losses or cash profits.

Most of the technology firms are in early habit formation stage, which entails significant investment in developing technology, brand, customers, refining algorithm to ensure customer stickiness, payoffs of which are known only over long period of time. While most of the new-age tech businesses may be loss making today, it is important to look for businesses that can get unit economics right.

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Thus, it is imperative to get the monetization engine right on a recurrent basis. It is important to understand whether the high engagement is leading to habit formation and repeat usage. Repeat usage in market where opportunity is large, unit economics is favourable can provide a good direction of structural profitability and cash flow generation potential and the eventual capital efficiency – key tenets of value creation for any business.

Digital adoption should continue to rise and will throw open lot of opportunities in future. However, focus must be on right business model.

Do you expect another 75-bps hike in interest rates by the US Federal Reserve in December policy meeting after October US inflation and other economic data points?

We have recently seen some moderation in US CPI number. US CPI was down from 9.06 percent in June 2022 to 7.75 percent in October 2022. While US Fed may continue to tighten interest rates in the near term, the drivers of inflation have started to turn.

Prices of major commodities have corrected from highs. Supply chains have started to normalize. Global Freight Indices, even though are higher versus pre-Covid-19, have fallen sharply.

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Housing prices have also started to cool off. This should lead to inflation pressure easing gradually and thereby impact on the interest rates. Spanner in the works can be if we see incremental supply shocks.

Do you think the Reserve Bank will continue its interest rate hike cycle in rest of financial year considering the current economic data points and global environment?

Since May 2022, the RBI has raised the repo-rate by 190 bps to 5.90 percent and will continue to take cues from its global counterparts, including the US Federal Reserves to tame the currently stubborn inflation.

CPI-based retail inflation which has started showing signs of moderation since May, has again firmed up to 7.4 percent in September 2022. Inflation continues to remain higher than the target of 4 percent with +/-2 percent tolerance band.

Given the sticky nature of inflation so far, RBI may continue its interest rate hiking cycle for now. Further, RBI action may be more data dependent and they will continue to monitor the inflation trajectory to take incremental actions.

Is the bulk of rupee depreciation pressure against the US dollar over?

While the rupee has depreciated 9.3 percent in this current year-to-date (CYTD), its performance has been one of the better ones among large economies.

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Barring Brazil, INR performed better than most other large economics versus USD. Relatively better performance has been a result of multiple factors:
a) Relative growth superiority
b) Reducing inflation differential: with higher focus on Atmanirbhar Bharat and reforms related to improvement in supply side economics
c) Large domestic market
d) Self-sufficiency in many raw materials (crude remains a risk)

e) Strong performance of India Inc.

Most of the drivers of INR has been structural in nature.

What is your take on the telecom space? Do you expect significant growth in the space?

We are positive on the telecom space in general. Over the last couple of years, though large telecom companies' operational performance has been strong, they lagged in free cash flow (FCF) generation and deleveraging, which posed a key concern for the sector.

FCF is a key factor in telecom business as technology upgradation continually keeps capex intensity high. However, we now believe despite the upcoming investments in 5G, the sector is witnessing a strong shift in its FCF generation capability that could translate into healthy deleveraging.

Industry dynamics are turning favourable with multiple levers of growth for the sector including shift toward 4G/5G, tariff hikes, and market share gains.

Also, higher 5G usage can throw open lot of new opportunities. With high capacity and ultra-low latency, 5G will give artificial intelligence (AI) and Internet of things (IoT) applications a major boost across a range of industries and use cases.

Consumers will see changes including more immersive gaming and improved retail experiences.

Is it better to play the expected expansion in capex cycle with the directly benefitted stocks or indirectly benefitted stocks? 

India has historically focussed on services for its growth, and that has done well. However, it has not been able to realise its true potential with respect to industrial transformation that countries like China have seen.

Now, we see a turn in the manufacturing sector in the country. Production linked incentive (PLI) will go a long way to support this. PLI for 14 sectors including mobile phones, automobiles, solar panels, advanced batteries have been announced. Idea is to manufacture for the country and for the world.

We are focussing on enhancing domestic capacity, reduce external dependence. As corporates world over are shifting supply chains from ‘efficiency’ to ‘resilience’, India has an opportunity to increase its manufacturing. This manufacturing revival should help spur the whole ecosystem of component businesses, logistics, staffing et al.

Manufacturing in India can also spur investment in capex. Consequently, capital goods businesses are seeing heightened activity after more than a decade. However, we believe this time we would see higher capex in short cycle, efficiency, and digitization.

In the short worker world, automation is also expected to see higher focus.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Nov 17, 2022 09:10 am