Telecom sector may remain three-player market, Vodafone Idea seen surviving

ARPU gains, hopes of government intervention and upgrades for Vodafone Idea strengthen Street's view

Telecom stocks have been among the biggest gainers over the past month on the back of strong March quarter results, greater interest of technology giants in this sector, and expectations of a gradual increase in tariffs over the next few quarters.

The lower impact of the Covid-19 crisis and a jump in data consumption have boosted their attractiveness. Though Bharti Airtel has moved up 7.1 per cent, the biggest gainers have been Bharti Infratel (which has surged 33.8 per cent) and Vodafone Idea, which is up 141.7 per cent over this period. Thanks to the Bharti twins, the sector has been the biggest gainer in the Nifty50 since March lows. It has more than doubled its weighting in the Nifty since December, according to a Motilal Oswal Financial Services report. 

The bullish outlook on these stocks, especially Bharti Infratel and Vodafone Idea, has been because of the Street’s view that the sector is likely to remain a three-player market. An analyst at a foreign brokerage says: “The price movement of Bharti Infratel and Vodafone Idea seems to strengthen the idea that the government will step in to ensure the survival of Vodafone Idea.”

The Street believes the shutting of Vodafone Idea will have multiple implications, going beyond the telecom market. In addition to lost revenues for the government (spectrum, AGR, and taxes), the bankruptcy might add to the stress of the banking sector and put off foreign investors. Besides expectations of government support, Naveen Kulkarni, chief investment officer at Axis Securities, believes a gradual uptick in average revenue per user (ARPU) will support the three private-player market. 

 

 

Vodafone Idea’s ARPU in the December quarter stood at Rs 109, up 22.5 per cent over the year-ago quarter. The company is expected to post a 3.7 per cent increase in ARPU in the March quarter to Rs 113. CLSA expects the company’s ARPU, which lagged peers by 15-19 per cent, to grow 30 per cent by FY22 and the subscriber loss to decelerate. While the stock has nearly trebled over the last three months, the brokerage expects further upside and has set a target price of Rs 12. Bharti Infratel’s gains also ride on the survival of Vodafone Idea, as the collapse of the company will leave it with a single anchor tenant across its towers, which is not a viable proposition.

Though the Street is bullish on the sector, not all are on the same page about the sector remaining a three-player market. Rajeev Sharma, head of institutional research at SBICAP Securities, says: “For the telecom sector to settle to a three-player market, Vodafone Idea needs a strategic investor to take a substantial stake, an extended payment period on adjusted gross revenues, and finally meaningful capex on 4G.” The company needs to gain market share across circles to be in the reckoning, he adds.

While the sector has already been rerated, the key trigger remains a further rise in ARPUs. Tariffs were last raised in December by 25-40 per cent. Most analysts expect ARPUs to move to the Rs 200-mark, from the current Rs 154 for Bharti Airtel and Rs 130.6 for Reliance Jio. The increase in ARPUs is expected, given the low mobile revenue to GDP ratio in India, a fall in competitive intensity, and pricing discipline. 

Analysts at Jefferies expect sector revenues to double to $38 billion by FY25, from $19 billion in FY20. Strong subscriber addition for Bharti Airtel and Reliance Jio after the tariff hike is an indication that customers have accepted the increase. The improvement in ARPU is also expected to come about on higher 4G subscriber additions. In the near term, the Street will keep an eye on the Supreme Court decision on AGR and possible moves by the government to ensure the survival of Vodafone Idea.