Tariff hikes cheer Indian telecos
A recent tariff hike has come as a relief for the troubled Indian telecom sector, raising hopes of a revival. Financial Services firm Motilal Oswal’s latest report said that the tariff hike will give a boost to the industry and help it overcome the blues caused by the price war.
“We believe the recent tariff hike is a beginning of trend reversal with more price hikes to come in 2020. The incremental price hike is a function of support for VIL ( Vodafone Idea Ltd) and the needed profitability boost to RJio and Bharti. This could be a turning point for the industry, wherein incremental capital commitment would decline with players agreeing on better tariffs,” said the report. “With the recent positive developments in the industry and potential trigger points, we believe that the sector offers strong operating, financial and valuation leverage. While Vodafone Idea would need more measures for its survival, RJio, and Bharti stand to benefit significantly from further relief measures,” it said.
Telecom companies have announced a strong 25% Average Revenue Per User (ARPU) the hike which is expected to add INR 293 billion /INR 190 billion to the industry’s overall revenue and EBITDA (earnings before interest, tax, amortization and depreciation) in 2020-21.
“However, 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 (and thus, reduce their subscriber base)”, said the report.
RJio, with the highest share of smartphone devices (estimated at 79%), could see the highest gain.
Bharti’s consolidated revenue/EBITDA can rise by INR 112 billion/INR 81 billion, while RJio’s revenue/EBITDA go up by INR 133 billion/INR 96 billion, said the report, adding that VIL is likely to see the highest operating leverage given its lowest EBITDA margin, and subsequently, it’s revenue/EBITDA should increase by INR 102 billion/INR 74 billion.
The price plan has been devised keeping in account limited risk of downtrading as data volume offerings have come down by over 90% for the base plan priced 25% less. The industry ARPU increase was based on
three factors - ballooning leverage, negative free cash flow, and reducing network/pricing arbitrage.
“To resolve the telecom industry’s nearterm cash flow issues and to alleviate financial stress, the government is exploring (a) telcos plea of offering moratorium for AGR liability and the possible reduction in penalty and interest, (b) GST input tax credits of INR 80-90 billion for Bharti/VIL, (c) reduction of the current UFO obligation, which stands at 5%, thus reducing license/spectrum fee to 5-6% from the current 12% level “it said.