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ARPU can rise to more than  ₹200 if the regulator sets a floor price as suggested by telcos, said an analyst at a domestic institutional brokerage firm. (Mint )
ARPU can rise to more than 200 if the regulator sets a floor price as suggested by telcos, said an analyst at a domestic institutional brokerage firm. (Mint )

Looking for virus-proof stocks? Consider telecom firms after tariff truce

  • The extent of the hike and its impact on volumes will be known only after a while, but it is clear that ARPU and eventually earnings are set to rise
  • ARPU can rise to more than 200 if the regulator sets a floor price as suggested by telcos, said an analyst at a domestic institutional brokerage firm

Less than six months ago, investors had serious doubts about the future of the telecom sector, after the adverse Supreme Court ruling imposed massive penalties on incumbent telcos.

However, now, telecom companies are among a rare set of firms that will be immune to the earnings hit because of the spread of Covid-19. To start with, tariffs were raised in December after a nudge from the government and the recent responses of telcos to a discussion paper on floor tariffs show that there is a rare consensus among them for a further hike in tariffs.

The extent of the hike and its impact on volumes will be known only after a while, but it is clear that average revenue per user (ARPU) and eventually earnings are set to rise. “It can be reasonably assumed that the regulator may side with market participants in setting a floor price," said Rajiv Sharma, co-head (research) at SBICAP Securities Ltd.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

As far as the contagion goes, this may well result in more volumes for telcos, as firms are increasingly allowing employees to work from home. While the disruption in supply chains may hit sales of handsets, this is unlikely to affect the services of telcos, say analysts.

Results of the tariff hikes in December are expected to boost earnings in the March quarter. However, note that earnings had been gradually rising in the past three quarters. “Tariff hike by telcos may, we believe, boost sector revenue by at least 15-20% in FY21," said SBICAP Securities in a note last month.

Operating losses at Bharti Airtel Ltd are already coming down and fresh tariff hikes should accelerate the turnaround. “On a 9MFY20 basis, Bharti is on its way to reach cash breakeven (EBITDA-interest-tax-capex) due to reduced capex intensity. Management has also guided that the peak capex cycle is over and capex intensity will not go to the past levels. On the revenue front, ARPU at 135 had shown a healthy QoQ growth of 5.3% in 3QFY20 and could trend higher once the full benefit of tariff hike kicks in," said JM Financial Institutional Securities Ltd in a note. Ebitda stands for earnings before interest, tax, depreciation and amortization.

ARPU can rise to more than 200 if the regulator sets a floor price as suggested by telcos, said an analyst at a domestic institutional brokerage firm.

There are also concerns about the sustainability of price hikes beyond a certain threshold, given that some companies may prefer to prioritize market share growth over profit growth. In their response to the regulator on floor pricing, telcos blamed each other for the lack of pricing discipline, while batting for a floor price.

Perhaps, a strictly enforced floor price that can’t be thwarted with segmented offers will bring an end to the bickering. It’s an outcome that investors will welcome, especially after the value destruction in the sector owing to hypercompetition.

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