Telcos earnings, ARPU to improve with tariff hike: Analysts

The latest price hike by the top three telecom firms Airtel, Vodafone Idea and Jio will lead to shoring up their topline and earnings, improve average revenue per user (ARPUs) and may provide some cash for balance sheets to offset the provisioning for their high adjusted gross revenue (AGR) dues, according to analysts.

The tariff hikes of 25-35 per cent will provide the much needed recovery of revenue and Ebitda (Earnings before interest, taxes, depreciation, amortization) for incumbent firms, Fitch Ratings Director (Corporates) Nitin Soni told .

Axis Capital said the increase in tariff is in line with the companies' communication in November tariffs will be hiked in the next few weeks to strengthen the industry and companies will compete on the basis of quality and service.

According to Axis, the move on price hike marks a trend reversal in the industry. As Reliance Jio was at the forefront of aggressive pricing in the sector, resulting in bankruptcy of weaker players and increasing financial stress for Bharti Airtel and Vodafone Idea (VIL), the announcement of price hike by Jio is likely to set the stage for improvement in the financial health of telcos with incumbents also taking price hike without risk of subscriber loss.

"Price hike will help increase ARPU of telecom players that may get amplified by operating leverage", it said.

On Vodafone Idea, the brokerage said though the quantum of price hike is still not enough for sustainability of Vodafone Idea, the trend reversal opens scope for another round of price hikes.

"Our analysis indicates RJio/Bharti Airtel/Vodafone Idea are offering services significantly below cost."

Jefferies said in a note that Vodafone and Airtel have increased headline tariffs by 15-47 per cent across prepaid plans. Jio will also hike by up to 40 per cent. "Revenue increase will be 11-23 per cent lower than hikes due to data elasticity resulting in downtrading and SIM consolidation, no increase in postpaid and lower hike in voice," it said.

Goldman Sachs said that with Bharti and VIL announcing a fairly large tariff increase in one go, it could be some time before either company announces another future tariff hike.

"We note that our FY21E EBITDA estimates for Bharti (wireless) and VIL are 57 per cent/80 per cent higher versus that in FY20E - which assumed about 10 per cent higher tariffs towards end of FY20E," it said.

Goldman Sachs also said there is high sensitivity of cash flows to tariffs and there can be another 10 per cent increase in the next fiscal as well.

"Our current estimates for Indian telcos assume about 10 per cent higher tariffs in FY20E (FY20E exit numbers versus 2QFY20E) on prepaid bundles, and another 10 per cent increase in FY21E, with no increase on feature phone tariffs. Based on yesterday's announcement, we estimate VIL's revenues could be about 22 per cent higher (assuming a subsequent hike even for postpaid), versus what they reported in 2QFY20, with EBITDA about 170 per cent higher," it said.

"At this revised EBITDA level, VIL's net-debt-to-EBITDA would be 9x (on September 2019 net debt), and 13x including full AGR liability, versus 20x reported as of September 2019. For Bharti Airtel, assuming the announced tariff details, revenues could potentially be 24 per cent/12 per cent higher for wireless/consolidated (versus what they reported in 2QFY20), with EBITDA 70 per cent/26 per cent higher (wireless/consolidated)", it added.

Bank of America and Merrill Lynch said more tariff hikes could follow.

"We expect more tariff hikes to follow and remain bullish. We consider Bharti and RIL as better telco names that benefit from tariff hikes and remain bullish. While VIL may show maximum upside, the overhang from the AGR issue does not make its risk-reward favorable", it said.

VIL and Bharti Airtel have announced tariff hikes which will be effective from December 3.

While very low and very high denomination tariffs were hiked by up to 41 per cent, the popular plans saw tariff hikes of 25-30 per cent. For instance, for VIL and Bharti, the minimum Rs 35 denomination plan has now moved to Rs 49.

For VIL, the popular 1.5 GB/day, 84 day pack will cost 31 per cent more at Rs 599 versus Rs 458 (33 per cent hike for Bharti) and 25 per cdent hike for Rs 199 (will be now Rs 249), 1.5 GB/day pack. A 41 per cent increase comes on the annual plan of Rs 1,699 which will now cost now Rs 2,399.

On an average, the tariff hikes by Bharti and VIL are of similar magnitude.

Emkay DBS Equity Research said that, in addition, free voice usage has also been restricted. Based on tariff hikes, sector revenues and Ebitda will increase by Rs 530 billion and Rs 420 billion, respectively, given no major SIM consolidation.

According to the analyst, bottom-of-the-pyramid consumer spending behavior risk can be at risk after the steep hikes.

"Content offering and network quality are key differentiators for subscriber retention as we expect Jio's pricing gap to narrow," it said.

Vodafone Idea and Airtel face about Rs 1.3 lakh crore AGR dues to be paid by January 24, while they have a combined debt of Rs 2.20 lakh crore. They are loss making firms and have made provisions of Rs 50,000 crore in their balance sheets to meet AGR dues.

( With inputs from IANS )