More pressure ahead for telcos

Telecom stocks were under pressure over the last week as incumbents launched competitive tariffs to match those of Reliance Jio (RJio), which could lead to revenue loss and muted margins. Idea Cellular's management also highlighted this week that its priority is 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 introduced unlimited plans recently priced between Rs 144 and Rs 349 for unlimited calls both on their networks and outside of it. 4G users will get data between 300MB and 1GB. These tariffs will be detrimental to average revenue per user of the major operators, and will keep the share price of listed players under pressure.

Analysts at HSBC say while Bharti's Rs 345 plan translates to double its current average revenue per user (ARPU), if its higher end users were to move to it, there could be ARPU erosion and margin decline for the company. Moreover, there may not be many takers till RJio's free offer continues. Further, the moves, according to them, highlights that that Bharti is willing to sacrifice revenues and readjust to lower ARPUs in order to retain subscribers.

The Idea management too has been indicating that pricing pressure due to 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 its subscriber base and market share and improve data traffic for better utilisation of their under leveraged infrastructure.

Given the pressure on tariffs and profitability, brokerages are underweight the telecom sector and on Bharti and Idea though the former is a preferred option. Given pricing pressures, analysts at Morgan Stanley believe that operating profit for the two telcos could stagnate over the next four quarters. In fact, they add that if the discount between incumbent operator tariffs and Jio (currently at over 30% with Jio being lower) reduces by half, then at risk will be 20% of net profit for Bharti Airtel while Idea could report losses. Nevertheless, it believes given its spectrum edge, 4G footprint, 25% of operating profit from non-wireless business and a stronger balance sheet, Bharti is a better bet than Idea.

The worry for the industry, however, is worsening of the pricing situation. Analysts at Credit Suisse believe that recent pricing cuts are not the end of the tariff moves by Indian telcos yet. They add that RJio has sufficient room to cut tariffs further and that tariffs from April 1, 2017, would be different from the one announced on September 1. The brokerage suggests investors trim their positions in Bharti given the uptick earlier in the month.

Given the erosion in pricing, investors should avoid this sector for the time being.