Analysts positive on telecom service providers despite delay in tariff hike

India Ratings believes increasing data usage and rising proportion of higher ARPU data customers in the overall subscriber mix hint that even without tariff hikes, the sector is structurally strong

A delay in expected tariff hikes by Bharti Airtel, Vodafone Idea (Vi), and Reliance Jio has not turned analysts cautious on the sector. On the contrary, the underperformance of Airtel and Vi relative to the Sensex and BSE Telecom indices on a year-to-date (YTD) basis, can be used as an opportunity to enter these stocks from a long-term perspective, they say.

Thus far in CY21, Airtel has risen 2.6 per cent on the BSE, while Vi has declined 14.4 per cent. RIL’s stock that is now seen by analysts as a play both on telecom and oil has risen 0.5 per cent. In comparison, the Sensex and BSE Telecom have risen 3 per cent and 2.9 per cent, respectively.

Calling telecom a Covid-resistant sector, Ambareesh Baliga, an independent market analyst, said: “While potential increase in average revenue per user (ARPU) remains a key trigger for Vi, correction from recent highs makes Airtel attractive. Therefore, Vi investors can stay put for now, new investors can put in money in Airtel,” he says.

Tariff hike delayed

The impasse on tariff floor pricing, indirect impact of inflation, and fear of a possible subscriber churn due to any sudden tariff hike aggravating the financial stress in the sector, are among the reasons for telcos refraining from hiking tariffs, analysts say.

Yet, Vi hiked prices of two entry-level postpaid plans priced at Rs 598 to Rs 649, and from Rs 749 to Rs 799 early this week. However, the 5-7 per cent hikes in postpaid plans will help Vi’s revenue by 1 per cent since the hikes are in a few select plans, notes CLSA.

Unlike the other two, its weak balance sheet is pushing Vi to hike tariffs, analysts say, and this may put it to some risk of losing subscribers.

Data released by the Telecom Regulatory Authority of India (Trai) showed that Vi’s gross subscribers additions turned positive for the first time in 14 months in January, with 1.7 million additions (to 286 million subscribers), while the monthly decline in active subscribers slowed to 0.3 million, compared with a loss of 1.5 million in December. However, the firm later flagged an “inadvertent error” in the subscriber data, which is being examined by Trai.

Airtel, on the other hand, added 6.9 million active subscribers, taking its tally to 336 million. It commands a market share of 29.6 per cent. Analysts at Emkay Global say strong data subscriber additions in Q3 and sustained momentum in Q4 should continue to improve Airtel’s revenue mix and support ARPU improvement even without a tariff hike.

Jio, meanwhile, has a market share of 35.5 per cent after it added 2 million subscribers on a gross basis (active subscribers were down by 3.5 million) in January.

Jefferies thinks hefty spends in the recent 4G spectrum auction has also pushed back tariff hike.

Jio’s Rs 57,100-crore spend on spectrum and Airtel’s approach of acquiring more spectrum in weaker markets do not bode well for the tariff environment, it said in a March 8 report.

Nonetheless, analysts expect the three telcos to raise tariffs in the coming quarters, which would strengthen the case for the sector. In this backdrop and amid expectations of growing revenues and usage, most analysts appear positive on the sector.

JM Financial opines that Jio would hike tariffs, likely by end FY22, once its subscriber base reaches 500 million supported by successful traction in the new Jiophone offer and the impending smartphone launch.

Others like India Ratings maintain a ‘stable outlook’ for now. It believes the sector is structurally moving towards a higher-ARPU regime, even without tariff hikes, on the back of increased data usage and rise in proportion of higher ARPU data customers in the overall subscriber mix.

“Growth in ARPU offers opportunities for all three players. With tariff hikes and rising 4G data, the sector’s revenue may reach $32 billion by CY23 compared with the current $23 billion,” a CLSA report said.