Analyst Corner: Recent rate hikes trigger trend reversal in Telecom sector

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Published: January 15, 2020 6:10:34 AM

This could be a turning point for the industry, wherein incremental capital commitment would decline with players agreeing on better tariffs.

The incremental price hike is a function of support for VIL and the needed profitability boost for RJio and Bharti. The incremental price hike is a function of support for VIL and the needed profitability boost for RJio and Bharti.

After a prolonged period of pain, the telecom sector has got a fresh lease of life, thanks to the recent unprecedented tariff hike and the government’s efforts to revive profitability. We believe the recent tariff hikes is a beginning of a trend reversal with more to come in 2020. The incremental price hike is a function of support for VIL and the needed profitability boost for RJio and Bharti. This could be a turning point for the industry, wherein incremental capital commitment would decline with players agreeing on better tariffs. We believe the sector offers strong operating, financial and valuation leverage. While VIL would need more steps for its survival, RJio and Bharti stand to benefit significantly from further relief measures.

To address the risk of the looming adjusted gross revenue (AGR) liability and alleviate the financial stress, telcos have announced a strong ~25% Arpu increase, which should add Rs 29,300 crore/Rs 19,000 crore to the industry’s overall revenue/Ebitda in FY21E. But given the second SIM card phenomenon, we estimate there could be ~20-30% leakage (partly factored in), which could be more pronounced for weaker players due to the risk of customers retracting back to the primary SIM. In this case, RJio has the highest share of smartphone devices, and therefore, could see the highest gain. On Q2FY20 annualised basis, Bharti’s consolidated revenue/Ebitda can rise by Rs 11,200 crore/Rs 8,100 crore, while RJio’s should increase by Rs 13,300 crore/Rs 9,600 crore. VIL is likely to see the highest operating leverage, given its lowest Ebitda margin and subsequently, its revenue/Ebitda should rise by Rs 10,200 crore/Rs 7,400 crore. Telcos have devised price plans in a manner where there is limited risk of downtrading as data volume offerings have reduced by over 90% for the base plan, which is priced ~25% lower. Further, industry Arpu rise was hinged on three key triggers — ballooning leverage, negative FCF, and reducing network/pricing arbitrage.

This had led to slowing subscriber churn and limited growth opportunities, thus compelling telcos to keep Arpus on a growing trajectory. Assuming Rs 25,600 crore of annual cash requirement, which includes capex, cash interest cost and deferred spectrum liability, VIL needs Arpu of Rs 18,400 to survive.

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