Telecom sector pines for tariff call

Overall, the AGR growth in the telecom industry slowed down last quarter due to muted subscriber addition and absence of tariff hikes.
Overall, the AGR growth in the telecom industry slowed down last quarter due to muted subscriber addition and absence of tariff hikes.

Summary

Vodafone Idea proposes to infuse a total equity of 14,000 crore in the near term as part of its business revival plan.

The potential equity infusion in Vodafone IdeaVodafone Idea Ltd comes as a breather amid increased possibility of the telecom sector moving towards a duopoly. According to an Economic Times report, Vodafone Idea proposes to infuse a total equity of 14,000 crore in the near term as part of its business revival plan. Existing promoters Aditya Birla GroupAditya Birla Group and UK’s Vodafone Group Plc will soon invest 2,000 crore, after already having invested 5,000 crore in 2022. The remaining quantum would be raised through other lenders. Recall that in the March quarter (Q4FY23) earnings call, Vodafone Idea had said that it is in discussions with three potential lenders for fund raise.

Shares of the company rose by 7% in early trading hours on Wednesday, but the stock gave up some of the gains later, and closed nearly 3% higher. True, the news is sentimentally positive, but investors will wait to see results. “Vodafone Idea’s earlier plans to raise funds have not fructified, unfortunately. But an actual fund raise is crucial to boost investors’ confidence and revive its business. Given this, the quantum of capital raise would be closely watched," said Vivekanand Subbaraman, analyst at Ambit Capital.

Graphic: Mint
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Graphic: Mint

As on 31 March, Vodafone Idea’s cash & cash equivalents, and net debt were 230 crore and 2.09 trillion, respectively.

In this backdrop, the success of a fund raise is critical as the slower deployment in 5G capital expenditure (capex) is putting the company on the backfoot with bigger peers Reliance Jio and Bharti Airtel Ltd already rolling out 5G services.

Vodafone Idea continues to be on a weaker footing in the industry. Take the adjusted gross revenue (AGR) data from Telecom Regulatory Authority of India, for instance. As the chart alongside shows, Airtel and Jio’s AGR market shares (including income from national long distance) are on an uptrend while that of Vodafone Idea has dropped. In Q4, it was at a multi-quarter low even as the company has recovered some lost market share in metros.

Overall, the AGR growth in the telecom industry slowed down last quarter due to muted subscriber addition and absence of tariff hikes. The year-on-year growth in Q4 stood at 9% versus 15% in Q3.

To be sure, tariff increases are necessary for a re-rating in the telecom stocks. During the Q4 earnings call, Vodafone Idea said it will not be able to take the lead on tariff hikes, but would follow any tariff improvement actions by the market leaders. However, the possibility of hikes appears slim. “Rising competitive intensity (Reliance Jio’s aggressive family postpaid plans and unlimited 5G data offerings) to attract higher value subscribers and several key state/general elections over the next 12 months would likely delay tariff hike to June 2024 (after general elections)," said analysts at Kotak Institutional Equities in a report on 13 June.

But unless tariff hikes occur, the sector’s revenue growth in FY24 is likely to be muted. “The significant amount of cash required (for Vodafone Idea) to service debt leaves limited upside opportunities for equity holders, despite the high operating leverage opportunity from any Arpu increase," said analysts from Motilal Oswal Financial Services in a report on 13 June. Arpu is average revenue per user. Kotak’s analysts said the telecom industry’s implied Arpu in Q4 stood at 166 and has only now inched up above the pre-RJio launch (June 2016) levels. The delay in tariff hikes will hurt the cash strapped Vodafone Idea the most, although it may lead to continued market share gains for Airtel and Jio at the former’s expense. Vodafone Idea’s shares are down 22% from the 52-week high of 10.10 apiece in September.

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