Motilal Oswal Financial Services says a 15 per cent hike by Vodafone Idea and Bharti may be in the offing if the two players intend to go back to the same premium they enjoyed earlier over Reliance Jio.
Given the tiered approach they expect the tariffs to impact 70 per cent of revenues (non-feature phone base) and would increase their operating profit by 50-60 per cent each. While this will help, Vodafone Idea will still have its task cut out given lower annualised operating profit of Rs 4,000 crore and debt of Rs 1.2 trillion. For Bharti, the above hike would mean a 25 per cent jump in operating profit on a consolidated basis which for a free cash flow positive company should further aid valuations, they add.
IIFL believes that a 15 per cent hike is sufficient to neturalise the cash flow impact of the Supreme Court judgement for Vodafone Idea and Bharti Airtel, if the penalty is spread over 5-7 years.
The announcements come at a time when the government is mulling various steps, including a floor price for tariffs to offer, to alleviate the distress in the sector. In addition to this, the telecom regulator is also expected to decide on extension of interconnect usage charge or IUC of 6 paise a minute. Analysts say price increase announcements suggest that the two companies
expect an extension. “An extension would mean Jio does not roll back the price increases it took recently. This would mean increased degrees of freedom on pricing for Bharti and VIL,” say analysts at Kotak Institutional Equities.
Excluding AGR, most of the debt for telcos is on account of spectrum payments. While payments are staggered over the next 14 years, the situation is precarious for Vodafone Idea. While spectrum payments for Bharti Airtel at Rs 6,500 crore for FY20 is manageable given that it is a fifth of its estimated operating profit (about Rs 30,000 crore), Vodafone Idea will have to shell out over Rs 12,000 crore even as its operating profit is expected to be less than Rs 4,000 crore for the current financial year.
With Jio too hiking rates, the rally in telecom could last longer.
While hikes will help ease cost pressure for the incumbents, Bharti Airtel’s cash flows get a bigger boost.