More pressure ahead for telcos

Recent rate plans highlight more downsides till April 1, when RJio will start charging customers

Telecom stocks were under pressure over the past week as incumbents launched competitive rates to match those of newcomer Reliance Jio (RJio), which could lead to revenue loss and muted margins.

Idea Cellular’s management also highlighted this week that its priority was to protect its user base, especially high value customers, in the midst of a steep decline in voice and data pricing. Bharti Airtel, Idea Cellular and Vodafone recently introduced unlimited plans, priced between Rs 144 and Rs 349 for unlimited calls on their networks and outside of these. Fourth-generation technology (4G) users will get data between 300 mb and 1 gb. These rates will hit the average revenue per user (Arpu) of the major operators and keep the share price of listed players under pressure.

Analysts at HSBC say while Bharti’s Rs 345 plan translates to double its current Arpu, this could erode and margins decline if its higher end users were to move to it. More, there might not be many takers till RJio’s free offer continues. The move, they say, shows that Bharti is willing to sacrifice revenue and readjust to a lower Arpu to retain subscribers.

Idea’s management has also been indicating that pricing pressure due to the RJio offer and the subsequent decline in data and voice pricing is expected to continue. The key for both the listed telecom incumbents, Bharti and Idea, is to protect the subscriber base and market share, and improve data traffic, for better utilisation of their under-leveraged infrastructure.

Given the pressure on rates and profitability, the brokerages are underweight on the sector, and on Bharti and Idea, though the former is preferred. Given the pricing pressures, analysts at Morgan Stanley believe the operating profit for the two telcos could stagnate over the next four quarters. In fact, they add, if the discount between incumbent operator rates and those of Jio (currently at over 30 per cent, with Jio being lower) reduces by half, at risk will be 20 per cent of net profit for Bharti Airtel, while Idea could report losses.

Given its spectrum edge, 4G footprint, 25 per cent of operating profit from non-wireless business and a stronger balance sheet, Bharti is a better bet than Idea, they feel. The worry for the sector, however, is worsening of the pricing situation. Analysts at Credit Suisse believe the recent price cuts are not the end of the moves in this regard. They add that RJio has sufficient room to cut rates further and those from April 1, 2017, would be different from those announced on September 1. The brokerage suggests investors trim their positions in Bharti, given the uptick earlier in the month.

And, that given the erosion in pricing, investors should avoid this sector for the time being.