Telecom stocks jump on imminent tariff hikes3 min read . Updated: 02 Dec 2019, 10:59 AM IST
- At 0926, shares of Bharti Airtel were up nearly 9% at ₹480.80
- Reliance Industries Ltd—parent of Reliance Jio Infocomm--was nearly 4% higher at ₹1609.50
NEW DELHI : Shares of telecom companies jumped in early deals on Monday as India’s major private operators—Bharti Airtel, Vodafone Idea, and Reliance Jio Infocomm—are set to hike tariffs this week.
At 0926, shares of Bharti Airtel were up nearly 9% at ₹480.80, while those of Vodafone Idea soared 17.3%. Reliance Industries Ltd—parent of Reliance Jio Infocomm--was nearly 4% higher at ₹1609.50. The BSE telecom index surged 7.3% to 1,197.65 points.
Analysts at ICICI Securities are bullish on both Airtel, Vodafone Idea and have a ‘buy’ rating on the stocks.
“We have incorporated the just-announced tariff hikes in our model and increased our EBITDA estimate for Bharti by 23% and 24% for FY21E and FY22E respectively. Consequently, we increase our target price to Rs550 (from Rs450), but we cut our EBITDA multiple for India business to 9x FY22E (from 11x FY22E, as our earlier multiple had option value of tariff increase, or a 2-player market, which is now included in the model). We move Voda Idea’s rating from ‘under review’ to BUY with a target price of Rs8. We still see AGR liability resolution as key for VIL’s long-term value creation. Bharti Airtel remains our preferred pick," the brokerage said in a report.
On Sunday, Vodafone Idea Ltd, Bharti Airtel Ltd and Reliance Jio Infocomm Ltd said they will raise prices of their prepaid voice and data services, ending a protracted tariff war that dragged rates to the lowest in the world. The increases in most plans announced by the three operators are in the range of 15-47%. While the new tariffs for Vodafone Idea and Bharti Airtel will be effective starting Tuesday, Reliance Jio’s revised tariffs will come into effect on 6 December.
The tariff hike by the three operators is the first of its kind in more than a decade after years of competition ensured prices of calls and data services hit rock bottom.
“Telecom sector was reeling under multiple problems such as low tariffs, regulatory issues including AGR liability, cash burn, stretched balance sheet. We believe the just-announced tariff hikes of 15-40% were much required and will likely remedy most of the problems of the industry," said ICICI Securities.
With the latest tariff hike, the brokerage firm also expects the blended average revenue per user (ARPU) to increase by 21%.
“We have tried to work out the increase in blended ARPU for Bharti and Voda Idea based on their Q2FY20 numbers. However, since the companies don’t disclose the breakup, our entire working is based on our assumptions. Our working shows Bharti’s blended ARPU increasing by 21% to Rs156 from Rs128 and Voda Idea’s too by 21% to Rs131 from Rs107," ICICI Securities added.
According to brokerage firm Emkay Global, based on tariff hikes, sector revenues/EBITDA “will increase by ₹530 billion/Rs420 billion given no major SIM consolidation. Risk can be on bottom-of-the-pyramid consumer spending behavior after the steep hikes."
"We think, (tariff hike) would boost revenue growth. However, operators face large payouts after the adverse SC decision on the AGR matter and would need government support to mitigate the burden. We continue to like Bharti Airtel", said BNP Paribas in a 25 November note.
Vodafone Idea and Bharti Airtel, already reeling under heavy debt, reported record losses in the September quarter because of an unfavourable Supreme Court verdict that upheld the government’s broader definition of revenue on which it calculates levies on telecom operators. On 24 October, the Supreme Court directed telcos to pay at least ₹92,000 crore in past dues to the government within three months. Bharti Airtel and Vodafone Idea, along with two others, have filed a plea in the Supreme Court to review the verdict.
According to government data, the liabilities in the case of Bharti Airtel add up to nearly ₹35,586 crore, of which ₹21,682 crore is licence fee and another ₹13,904.01 crore is spectrum dues (excluding the dues of Telenor and Tata Teleservices, the companies that it acquired).
In a relief to telecom companies, the Union Cabinet on 20 November approved a moratorium of two years for spectrum payments.
Jefferies India expect despite the price hike, additional government relief measures are important. The brokerage firm expect a moratorium on AGR dues for the next two years, aiding cash flows. A reduction in license fee (helps Bharti/VodaIdea's EBITDA by 5%/28%) and an extension of interconnect usage charges (IUC) are also likely.