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Telecom services providers closed FY22 with an impressive jump in revenues. A key performance measure for telcos, average revenue per user (Arpu), got a boost from price increases taken in November.

Overall, FY22 net India mobile revenue grew 13% from the previous year, rising to an all-time high of $25.3 billion, driven by an 11% rise in Arpu, analysis by Jefferies India Pvt. Ltd based on the data published by the Telecom Regulatory Authority of India showed.

On growth path
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On growth path

Bharti Airtel Ltd outperformed, clocking about 21% year-on-year revenue growth in FY22, followed by Reliance Jio at 18% growth, while Vodafone Idea Ltd (VIL) was a laggard.

However, the role of price hikes is not over yet and remains a key catalyst for the sector. Telcos are already gearing up for this. In their March quarter earnings call, Airtel and VIL said that they expect their respective near-term Arpus to increase to Rs200 without specifying a timeline. This will require another round of price increases.

The VIL management recently told Mint that it aims to achieve Arpu levels of 350-400 over three to five years. In November, Airtel announced a 20-25% hike in prepaid tariffs.

Investors cheered, taking Airtel’s shares to a 52-week high in November. Competitors VIL and Jio followed suit, raising rates by up to 21%.

“We expect Jio might continue to participate in tariff hikes given that it needs to also focus on profitability (and not just on subscriber additions) as it prepares for its potential initial public offering in the next 1-2 years. Hence, we believe tariff hikes are likely to be more frequent," analysts at JM Financial Institutional Securities Ltd said in a report on 9 June.

In such a scenario, the sector could see a significant re-rating, said the JM Financial report.

“Airtel would require another 15% of price hike in the prepaid segment for its Arpu to reach 200; the quantum of price increases would be higher for others," said Piyush Pandey, an analyst at Yes Securities Ltd.

In Q4FY22, Airtel was leading the pack with Arpu of 178. “However, we do not expect price hikes to happen before the end of the calendar year 2022, and re-rating will be a gradual process. That said, a re-rating would benefit Airtel more than others given its premium quality of customers and stronger network connectivity,“ he said.

For VIL, the outlook is hazy unless there is meaningful capital infusion. VIL’s stretched balance sheet needs to improve to compete with Airtel and Jio in 5G auctions.

Developments related to 5G auctions are also key triggers for telecom stocks.

Here, the progress has been slow. The government is yet to decide on spectrum prices as telcos seek more cuts. A pricey spectrum auction means a higher capital expenditure for telcos, which could be a near-term concern for stocks.

“Spectrum pricing is crucial, but the ongoing tussle between telcos and technology companies regarding the allocation of 5G spectrum could mean a further delay in auctions. That is not necessarily a bad thing for the sector. Given the limited availability of 5G devices in the country, a gradual roll-out seems to be a practical approach," said an analyst with a domestic brokerage house requesting anonymity.

Meanwhile, diesel generators are also used to power mobile network towers, posing a risk to margins. Analysts at IIFL Securities Ltd note that every 10% increase in diesel cost results in a 25-40 basis points mobile Ebitda margin hit for telecom companies. One basis point is 0.01%.

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