1. As telecom war heats up, why this brokerage is bullish on Bharti Airtel

As telecom war heats up, why this brokerage is bullish on Bharti Airtel

Brokerage house ICICI Securities has reassessed its projections for the telecom sector both data and voice tariff. It has revised downward estimates for Bharti/Idea and maintained Buy rating on Bharti (Its preferred pick) and Idea with target prices of Rs 390 and R s105.

By: | Published: September 26, 2016 3:34 PM
As telecom war heats up, why this brokerage is bullish on Bharti Airtel Last week, Bharti Airtel, country’s largest telecom operator, launched a special data pack for its prepaid 4G subscribers called – Special 90 days free data pack. (Reuters Photo)

Ever since, Reliance Industries made a foray into telecom sector with Reliance Jio that offer free voice calling and cheap data plan, the battle has heated up between other telecom majors who have altered their voice and data plans to stay in the race. Last week, Bharti Airtel, country’s largest telecom operator, launched a special data pack for its prepaid 4G subscribers called – Special 90 days free data pack. For a recharge of Rs 1,495, consumers get 30 GB data for 90 days through Airtel’s data pack. If the data gets exhausted before the 90-day period, services will continue with a reset speed, which will be slower 2G speeds. However, Bharti Airtel is not offering free voice calls through the pack unlike Reliance Jio but has tried to match Jio’s offering for data.

Brokerage house ICICI Securities has reassessed its projections for the telecom sector both data and voice tariff. It has revised downward estimates for Bharti/Idea and maintained Buy rating on Bharti (Its preferred pick) and Idea with target prices of Rs 390 and R s105. In the aftermath of Reliance Jio launch the brokerage house has been bullish on Bharti Airtel saying its is the only operator to deleverage in next two years and show improvement
in return ratios.

It said, “In an exercise to reassess our projections for the sector, we have cut our voice tariff by 20 per cent in next two years, but maintain our data tariffs. We ascribe an aggressive revenue market share (RMS) of 10.2% to Reliance Jio (RJIO) by FY20E (around 50% of inc. industry RMS). We see a slower revenue growth of around 5% for Bharti/Idea during FY16-FY18E. We see tailwinds in Bharti’s cost, thus restricting EBITDA margin contraction, but assume an EBITDA decline for Idea.”

Below are the points ICICI Securities has made for the telecom sector

– Outgoing voice Average revenue per user (ARPU) for post-paid subscribers is at highest risk. Post-paid subs’ Adjusted Gross Revenue (AGR) ARPU is at Rs 560 and outgoing voice contributes Rs 321 (57% to ARPU) and rest Rs 239 comes from data, other VAS and net Interconnection Usage Charges (IUC) (around 2% drag). RJIO’s Rs 499 monthly (28 days) plan can potentially put pressure on post-paid ARPU particularly on outgoing voice. Notably, outgoing voice minutes/month is higher at 547 minutes, so we see higher interconnecting charges outgo in this category. Post-paid subs contributed 20% to industry AGR in FY16.

-Pre-paid on aggregate looks less vulnerable, but ARPU impact here cannot be ruled out. Aggregate pre-paid AGR ARPU is just Rs 103 and outgoing voice ARPU constitutes Rs 76 (74% of ARPU). The average outgoing voice minutes for pre-paid subs is just 169 minutes/month. Pre-paid ARPU is far lower than RJIO’s minimum pack of Rs 149 (Rs127 adjusted for service tax for 28 days). However, we don’t deny that a small portion of high-ARPU subs within the pre-paid category may gravitate towards RJIO’s Rs 149 and Rs 499 plans. Conversely, we see significant headroom within the pre-paid category from penetration of data usage driving ARPU upgrades. Unlimited free voice could impact challenger operators more in the pre-paid segment, where huge voice minutes are sold at discounted tariffs.

-Voice revenue per minute (RPM) to decline by around 10% each in FY17/FY18. RJIO’s unlimited free voice is likely to increase incoming minutes to incumbents, which will optically impact voice RPM (sensitivity: 10% rise in off-net incoming minutes will rise voice ARPU by 1%, but negatively impact voice RPM by 1.4%, (understanding voice RPM in pg 7). The brokerag ehiuse expects oiutgoing voice tariffs to be cut by 10% each year in FY17/FY18. It further hopes voice RPM to fall to 26-27p/min by FY18 (a fall of ~20%). Higher incoming minutes and price elasticity will compensate some of the price decline.

-No change in data estimates. Incremental data tariff of Rs150/GB by RJIO is in line with expectations; thus maintaining our data tariff estimates for now. Affordable data prices will drive faster adoption of data, and RJIO’s unlimited free voice would drive faster adoption of 4G-enbaled smartphones in the ensuing quarters. It also envisage competitive 3G/4G pricing to drive faster migration of subscribers to mobile broadband from 2G, hence driving usage and data revenues. The clear losers from faster migration to mobile broadband would be the challenger operators with limited or no mobile broadband spectrum, particularly for 4G.

-ICICI Securities expects RJIO to capture 102mn subscribers by FY20, which translates into a subscriber market share of 8.2%, and generate ARPU of Rs211. It further added that it hopes RJIO to capture a revenue market hare of 10.2% (Rs 237bn revenues) by FY20. The brokerage house concluded, “We believe these estimates are fairly aggressive as it implies 50% of incremental industry revenue to be captured by RJIO.”

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