With price hikes for prepaid plans being higher than what most analysts expected led to a rally in telecom stocks.
and Bharti Airtel gained 4-14 per cent in trade, while Reliance Industries was up 2.3 per cent. The gains for the incumbents have also come due to the new pricing structure by the two telcos, which leave little incentive for customers to downtrade to lower priced plans (below Rs 248).
Rohit Chordia and Aniket Sethi of Kotak Institutional Equities believe that Vodafone Idea and Bharti Airtel have kept a big gap in data offerings of entry-level and ‘popular’ bundled plans to address the issue of potential downtrading. For data customers, downtrading would mean leaving a lot of value on the table, while uptrading would offer significant incremental value.
Analysts, led by Naval Seth of Emkay Global Financial Services, believe that the tariff increase and SIM consolidation are positives for Bharti Airtel and Reliance Jio, as Vodafone Idea is still in the network integration phase and might continue to lose higher-than-estimated subscribers and revenue market share.
Analysts at the firm also believe that if the hikes are absorbed and data consumption trends sustain, it will provide confidence of incremental increases as well. In fact, Credit Suisse believes there could be more hikes over the next 12-18 months. In such a scenario, content offering and network quality are key differentiators for subscriber retention as Jio’s pricing gap vis-à-vis incumbents narrows. Despite the price increase, analysts believe that Vodafone Idea would still not be out of the woods. This is on two counts. One is market-share loss, especially in the eight weaker circles where its spectrum and network capabilities are inferior to Bharti Airtel and Reliance Jio.
With sharp revenue decline in these circles, Motilal Oswal Financial Services (MOFSL) questions the stability of operating profits after the price increase. Further, given the continued negative free cash flow position, worries still linger despite the ARPU increase. The large capital expenditure and interest cost of Rs 18,000 crore will mean its annual free cash flows will still be negative at Rs 8,500 crore in 2020-21 (FY21).
Brokerages believe that Bharti Airtel is in a better position and potential fundraising could ease the impending payments, including spectrum and AGR liability.
MOFSL believes that if Bharti Airtel plans to repay the AGR liability with a combination of equity (Rs 20,000 crore) and debt (Rs 14,000 crore), the firm will need to dilute 8 per cent equity at a pricing which would be 10 per cent higher than the current market price. Free cash flows could be sufficient for spectrum renewals in FY21 and support deleveraging.