BackSanity returns to telecom market, but miles to go for incumbents
Tariff increases will bring the telecom industry’s revenues back on the growth pathThe firms will be better able to invest in 4G networks, and their ability to service debt will improve
PremiumThe government’s bid to repair the telecom sector has brought much required reprieve for investors. Shares of Bharti Airtel Ltd and Reliance Industries Ltd, the parent of Reliance Jio Infocomm Ltd, have gained 37-47% so far in 2019.
After years of declining revenue, the industry is set to grow this fiscal year. As tariff hikes take full effect, analysts at JM Financial Institutional Securities Ltd expected revenue growth to accelerate to 25% in FY21. That is a remarkable change for an industry, wherein revenue was estimated to have fallen by about 11% in both FY19 and FY18.
Ratings agency Crisil said the industry’s average revenue per user (Arpu) may expand one-fourth from around ₹116 in FY19 to ₹145 next fiscal year. “With 25% growth in blended Arpu expected, Ebitda could double in fiscal 2021 to about ₹60,570 crore from ₹29,450 crore last fiscal," Crisil said in a note. Ebitda is earnings before interest, tax, depreciation and amortisation.
Undoubtedly, the incremental revenue will go a long way in easing the financial stress at Bharti Airtel and Vodafone Idea Ltd. The companies will be able to invest better in 4G networks and their ability to service debt will improve.
But everything is not as smooth as it seems.
Days after announcing price hikes earlier this month, telcos launched lower-priced monthly packs and reintroduced unlimited voice calls. This reflects that telcos are concerned about demand elasticity. Telcos continue to tweak the tariffs. On Sunday, Bharti Airtel raised the minimum monthly recharge for prepaid users.
Many expect the tariff hikes to trigger recalibration of customer spends on telecom services, through Sim card consolidation and shift to lower-priced packs. This can lower the revenue benefits from tariff hikes to some extent.
Further, industry leader Reliance Jio continues to price its services at a notable discount when compared to Airtel and Vodafone Idea. This indicates Jio’s unwavering focus on market share gains.
Airtel and Vodafone Idea also have an unenviable task of finding a way to clear the liabilities arising from the Supreme Court verdict on licence and spectrum fee due.
If Airtel has to borrow to clear its dues, then the company’s debt could rise by as much as 25%, calculations by Moody’s Investors Service showed.
The situation is precarious for Vodafone Idea, which is seeing operating losses and lagging behind in 4G network investments. Even after the cash flow relief from recent tariff hikes, analysts said, Vodafone Idea will have to infuse equity to remain solvent, especially if the government does not provide relief on the dues. With Airtel moving to raise fresh funds, all eyes will now be on Vodafone Idea.
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