A rise of Rs 25-30 in Arpu of Bharti and Voda Idea seen
Shares of telecom firms rallied on Monday, a day after the announcement of tariff hikes by them of up to 50%, as the move instilled hopes of revival in their financial health in the coming quarters. Shares of Bharti Airtel rose 3.67% to end the day at Rs 458.55 — its highest level since January 2018 — while Vodafone Idea rallied 14.06% to settle at Rs 7.79. The country’s most valued company, Reliance Industries, the parent of Jio, rose 2.3% to close at a fresh record-high of Rs 1,586.30 on the Bombay Stock Exchange. RIL’s share price has moved up by 17% since the first tariff hike (10-15% tariff increase) was announced on October 9, while shares of Bharti and VIL have risen 23% and 17% respectively in the same period against 7% rise in the Sensex.
The tariff increase announced by Vodafone Idea (VIL) and Bharti Airtel on Sunday will lead to an estimated increase of Rs 25-30 in their average revenue per user (Arpu). The operating income will get an incremental boost of Rs 8,000-9,500 crore for VIL and Rs 7,000-8,500 crore for Bharti. Interestingly, analysts do not rule out further price hikes in times to come, as the current hike may not be sufficient for sustainability of Vodafone Idea.
Both Bharti and VIL announced tariff hikes of up to 50% on their pre-paid plans, while Reliance Jio said it would hike its tariffs by upto 40%. The new tariffs will come into effect from December 3 for Bharti and VIL, while that of Jio from December 6. The quantum of the hike took analysts by surprise, as they had anticipated it to be in the range of 10-15%. “VIL and Bharti announced tariff hikes were better than expected,” said analysts at Bank of America and Merrill Lynch (BofAML).
While low and high denomination tariffs have been hiked by upto 41%, the popular plans saw tariff hikes of 25-30%. For instance for VIL and Bharti, the minimum Rs 35 denomination plan has now moved to Rs 49. For VIL, popular 1.5 GB per day, 84 day pack will cost 31% more at Rs 599 versus Rs 458 (33% hike for Bharti) and 25% hike for Rs 199 plan (1.5 GB/day pack). The 41% increase was on the annual plan of Rs 1,699, which will cost now Rs 2,399. “On an average, the tariff hikes by Bharti & VIL are of similar magnitude,” said BofAML analysts.
The below cost tariffs since the launch of Jio in September 2016 resulted in bleeding of incumbents, with cash flows getting impacted negatively. However, tariff hikes will give a fillip to revenues, Ebitda and is likely to improve net debt-to-Ebitda of the incumbents. Goldman Sachs estimates VIL’s revenues could be about 22% higher versus the revenues in Q2FY20 (Rs 10,840 crore), while Ebitda may go up by about 170%. The company had reported Rs 3,350 crore of operating income in the second quarter. At this revised Ebitda level, VIL’s net debt-to-Ebitda would be 9x, and 13x including full AGR liability, versus 20x reported as of September 2019. VIL’s net debt stood at Rs 1.01 lakh crore as on September 30, 2019.
For Bharti Airtel, assuming the announced tariff details, revenues could potentially be 12% higher on consolidated level versus Q2FY20 (Rs 21,131 crore), with Ebitda expected to be higher by 26% on consolidated level. Bharti had reported Rs 8,936 crore of Ebitda in the second quarter.
However, while Jio is yet to give detailed split of new plans, it is likely to maintain discount to Bharti and VIL. “Even with this kind of price increase, its most popular 84-day plan will be at an 11% discount to its peers. Therefore, Jio continues to price its plans at discount to peers. Our model already builds in Jio Arpu going from Rs 120 in Q2FY20 to Rs 150 after price increase (average price increase of 25%),” said analysts at Credit Suisse. BofAML believes even after these hikes, Jio will continue to be 15-20% cheaper than the incumbent operators.