Telecom Tariff Hikes - Why will they hike and why they will not
Despite two rounds of tariff hikes in the last three years, the Average Revenue per User of Bharti Airtel and Vodafone Idea continue to remain below 2016 levels.
The telecom companies, it is all about tariff hikes. After years of lower tariffs, companies have hiked prepaid, as well as postpaid tariffs to ensure business remains viable.
However, one of the concerns plaguing the street recently is whether telecom companies will be able to pass on more hikes to subscribers.
This was a key factor behind the recent underperformance of Bharti Airtel, shares of which are down close to 10 percent over the last month. There are concerns around the delay in tariff hikes and the subsequent impact on the Average Revenue per User (ARPU). The earlier expectation of the street was that of a 4G prepaid tariff hike in late 2022, nearly a year after the previous hike.
IIFL Securities has listed out some arguments in favour of a tariff hike:
There is rising urgency around a tariff hike, especially with Vodafone Idea struggling to raise equity and the government's delay in converting interest during moratorium to equity.
The note also said that the net-debt-to-EBITDA, or the number of years a company would take to repay all its debt if liabilities and operating profit are held constant is in excess of 3x.
IIFL also stresses on the need for a tariff hike as the recently launched 5G networks and acquiring 5G spectrum will require significant investments.
While Reliance Jio's potential IPO considerations are 18-24 months down the line, the unit will have to improve on its operating profit and free cash flow, according to the IIFL note.
Despite two rounds of tariff hikes in the last three years, the Average Revenue per User of Bharti Airtel and Vodafone Idea continue to remain below 2016 levels, further strengthening the case for a tariff hike.
However, IIFL has also listed a few arguments against a near-term tariff hike. One of the primary reasons is a weak consumption spending environment, particularly in the rural markets, which may limit the ability to absorb any further hike in tariffs.
A sharp jump in data capacity, planned by both Jio and Bharti over the next 18 months may also limit the scope of a tariff hike, according to IIFL.
However, the brokerage maintains that Bharti remains their top pick within the telecom space with a price target of Rs 909, and that the recent correction offers a good entry point to investors.
Bharti Airtel has been on the receiving end of mixed brokerage commentary over the last few days. Just a couple of days after CLSA highlighted five reasons why they remain bullish on the stock, JPMorgan downgraded the telecom major citing lower free cash flow and Return on Invested Capital (RoIC).
(Edited by : Hormaz Fatakia)
Note To Readers
Disclosure: Reliance Industries Ltd, which owns Jio, is the sole beneficiary of Independent Media Trust that controls Network18, the parent company of CNBCTV18.com.)
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