Markets
Telecom tariff hikes: Why urgency outweighs difficulty
Summary
The benefit of reduced spectrum usage charges on the Ebitda margin front would be relatively lower in Q4 given that companies have already realized a larger share of the benefit in the previous two quarters. Margins are expected to be flattish sequentially.
Telecom operators are likely to report dull financial results for the quarter ended March (Q4FY23) in the absence of price hikes and fewer number of days sequentially. Revenue and average revenue per user (Arpu) growth is expected to moderate. For instance, BNP Paribas Securities India expects domestic telecom industry revenue growth to moderate to about 10% year-on-year in Q4 from 17.5% in Q3 as the benefit of previous tariff hikes gets absorbed in the base. The broking firm expects sequential revenue growth to moderate to 1.5%.
Subscriber additions are likely to be a mixed bag. Vodafone Idea Ltd is expected to continue to lose subscribers in Q4. This could drive gains for Bharti Airtel and Reliance Jio in subscriber additions. For telecom companies, Arpu is a key metric to track, but growth momentum is unlikely to be exciting for Q4 given the absence of tariff hikes. “Overall, Arpu improvements should moderate with lower gains from 4G-led mix benefits," said analysts from Motilal Oswal Financial Services in their earnings preview report. They added, “Over the last few quarters, we saw sharp market share gains by Bharti and Reliance Jio from Vodafone Idea, which too may moderate given Vodafone Idea is now seeing decent network experience."
Further, the benefit of reduced spectrum usage charges on the Ebitda margin front would be relatively lower in Q4 given that companies have already realized a larger share of the benefit in the previous two quarters. Margins are expected to be flattish sequentially.
To be sure, while expectations from Q4 results are subdued, telecom companies are likely to close FY23 on a good note. Kunal Vora, head of India equity research at BNP Paribas said, “Tariff hike that was taken in November 2021 has boosted industry revenue growth in FY23, and we expect industry revenue growth to be strong at 17-18% in FY23 despite moderation in Q4FY23 growth."
Going ahead, tariff hikes are paramount for telecom companies for revenue growth and a key trigger for telecom stocks. Unsurprisingly, investor hopes are pinned on tariff hikes in the new financial year (FY24). But the outlook for tariff increase is dull. As analysts from IIFL Securities Ltd said in a 12 April report, “Persisting consumption spending weakness, elevated competitive intensity in light of Jio’s recent pricing interventions in the mobile post-paid and FTTH markets, and potential market-share gain opportunities for Jio and Bharti on Vodafone Idea’s delay in fund-raising—have reduced the probability of a tariff hike in the near term." With parliamentary elections in India lined up in H12024, IIFL now assumes tariff hikes only in Q2FY25.
Additionally, investor sentiments could stay muted as return ratios may remain under pressure. According to Vora, “Capital expenditure on account of 5G deployment is set to continue in FY24. Large investment in 5G spectrum and network is set to weigh on the near-term return ratio. An increase in Arpu is required to see an improvement in return ratios."
Against this backdrop, when telecom companies announce their Q4FY23 results, management commentary for Airtel and Reliance Jio on capex and tariff hikes remains crucial. With Vodafone Idea’s survival depending on fresh fundraising, any news flow on that would be crucial. The fundraise is also essential to ensure that it doesn’t fall behind in the 5G race, with peers having already taken the lead, point out analysts from Emkay Global Financial Services. From their 52-week highs, shares of Airtel and Vodafone Idea have declined by 11% and 45%, respectively.
