With the three major telecom operators in India – Reliance Jio, Bharti Airtel and Vodafone Idea (Vi) – taking a tariff hike of up to 25 per cent in July 2024 with a possibility of another hike this year by 10 per cent, JM Financial said, telcos’ ARPU is expected to grow at 11-12 per cent CAGR in the next 3-4 years. Given the consolidated industry structure and Jio’s need for higher ARPU to justify its significant 5G capex and also given its potential listing plans, the segment is expected to achieve an ARPU of Rs 280-310 in the next 3-4 years (via tariff hikes, MBB upgrades, post-paid additions and data monetisation) for a pre-tax RoCE of 12-15 per cent, the brokerage firm said.
Further, both Bharti Airtel and Jio’s management have reiterated that capex hit a peak in FY24 and is likely to moderate from FY25 with pan-India rollout of 5G already done. Thus, JM Financial said, Bharti Airtel’s India business FCF is expected to rise to around Rs 281 billion/ Rs 361 billion in FY25/FY26 and Jio’s FCF is projected to rise to approximately Rs 234 billion/ Rs 369 billion in FY25/FY26; Bharti/BHL/Jio are likely to get to net cash position by FY29-30.
Another healthy quarter for telcos
Telecom companies witnessed another healthy quarter, registering 4-6 per cent ARPU growth on-quarter during Q3. This was led by residual flow-through of the Jul’24 tariff hike.
“Bharti continued to lead with ARPU of Rs 245 (up 5.2 per cent QoQ) followed by BHL with Rs 241 (up 5.7 per cent QoQ); Jio had an ARPU of Rs 203 (up 4.2 per cent QoQ) or ~Rs 192 ex-FTTH, while VIL had ARPU (excluding M2M subs) of Rs 173 (up 4.2 per cent QoQ),” stated the JM Financial report. It further maintained that the full impact of the July 2024 tariff hike for Jio is likely to be visible by the next couple of quarters given more of its subscribers are on long-duration plans (compared to other telcos) while it should have largely been visible by Q3FY25 itself for other telcos.
Bharti, Jio and BHL added 4.9 million, 3.3 million and 0.5 million subs respectively in Q3, indicating that the SIM consolidation trend (witnessed post the Jul’24 tariff hike) is broadly behind. However, VIL continued to lose net subs (5.2 million).
‘Voice only’ plans not a bad news for ARPUs
Post TRAI’s directive, telecom companies have launched ‘voice only’ plans; but, according to JM Financial, this is unlikely to be ARPU-dilutive as these ‘voice-only’ plans have been introduced at only 5-10 per cent lower price vs the original prices of entry level ‘voice+data’ plans. Meanwhile, companies have also maintained or raised the tariff of entry level ‘voice+data’ plans by 5-15 per cent. This means that the ‘voice only’ plans are only 10-25 per cent cheaper vs entry level ‘voice+data’ plans.
Bharti’s management had earlier highlighted that though its 2G subs constituted approximately 33 per cent of its subs base at end-Q3FY23, they contributed only about 15 per cent of its overall wireless revenue. Further, VIL’s management also doesn’t see much risk of down-trading of subs to ‘voice-only’ plans given the limited price differential and most of them having data requirements to some extent, stated the JM Financial analysis report.
Rise in ARPU necessitated to justify huge investments
JM Financial said, “We continue to believe India wireless ARPU is on a structural uptrend given the consolidated industry structure, and higher ARPU requirement for Jio not only to justify its significant 5G capex but also given its potential listing plans. Jio also affirmed this by leading the last round of tariff hike in Jul’24 (vs being a reluctant follower of tariff hikes in the past), leading to improved outlook for future tariff hikes.”
India still has one of the lowest aRPU in the world at around $2.4/month vs the global average of $8-10/ month ($7.1/month in China). India’s ARPU to GDP per capita is low at around 1.0 per cent in FY24 vs +1.5 per cent before FY15. Per calculation by the brokerage firm, the industry requires an ARPU of Rs 280-310 in the next 3-4 years for a pre-tax RoCE of 12-15 per cent. Hence, JM Financial said, “We expect industry’s ARPU CAGR of 11-12 per cent: a) 3-5 per cent due to MBB upgrade, post-paid additions and data monetisation; and b) 6-7 per cent due to a regular tariff hike; this is likely to drive 13-15 per cent EBITDA CAGR over FY24-28.”
5G subs penetration improving
During Q3, 5G penetration continued to improve for Jio and Bharti with around 170 million 5G subs for Jio (vs 148 million in Q2FY25) and around 120 million 5G subs for Bharti (vs 105 million last quarter), aided by improved affordability of 5G smartphones. However, per JM Financial, 5G subs penetration level is still only 30-35 per cent primarily due to lack of killer 5G use-cases and 5G smartphone affordability constraints. “Hence, Jio and Bharti have continued with their unlimited 5G data offerings though they require their subs to subscribe to plans with minimum 2GB daily data allowance (starting Rs 349 for Jio and Rs 379 for Bharti) to enjoy unlimited 5G data. Thus, 5G monetisation has been limited so far except via an overall tariff hike; this is also because 5G provides more speed at lower cost/GB of data consumed,” it said.
Will VIL be able to turn around into a sustainable telco?
Despite an equity fund- raise of around Rs 260 billion, JM Financial said, for VIL to turn around into a sustainable telco it still needs: a) multiple significant tariff hikes that can boost ARPU to +Rs 380 by FY27 (vs ARPU of Rs 173 in Q3FY25) so as to meet the annual Rs 430 billion payment obligation to government of India (GoI) over FY27-31 (and ~Rs 280 billion payment in FY26); b) partial relief from GoI dues (either via conversion of the shortfall to equity or further extension of moratorium); and c) ability to internally fund a sharp sustainable jump in capex to Rs 100bn-150 billion p.a. in the long term or 15-20 per cent of revenue.
Per JM Financial calculation, VIL needs ARPU to jump sharply to +Rs 380 in FY27 to meet the annual payment obligation; else, it might face a shortfall of +Rs 400 billion in FY27 towards payment of GoI dues, which could lead to minority stake getting diluted to ~24.9 per cent from the current ~38.6 per cent if GoI converts this shortfall into equity.