Pricing pressure could intensify for Airtel

RJio has room to cut tariffs further once it launches paid services

The Bharti Airtel stock, which has shed nine% since the first week of December when it introduced bundled offers, including free voice calls, could see more pressure given higher data offer plans announced on Tuesday. According to the offer, new 4G subscribers,  both prepaid and post-paid, would get 3GB additional data till the end of the year (December 31, 2017).

Analysts at ICICI Securities believe the latest offers are meant to protect massive average revenue user erosion from Reliance Jio (RJio) free services till March 31 and stop subscribers from migrating to RJio when it ends the services. As the offers are meant for 4G users, this could lead to faster adoption of 4G services, with operators who lack 4G coverage, thereby losing out to those that have wider coverage and spectrum bandwidth. 

Given the 12 months’ validity of the new scheme, the impact of the price war on the data segment could extend well beyond the initial estimates with FY18 earnings estimates expected to see more downside risk, say analysts.

The Bharti Airtel stock was, however, flat in Wednesday’s trade, as some of the announcements were on expected lines. Analysts at Credit Suisse had earlier indicated last month’s Airtel offer was not the end of tariff moves, as Jio has sufficient room to cut tariffs further than what is already announced. They expect the final tariffs for Jio application from April 1, 2017, to be different from those announced on September 1, 2016. The brokerage house continues to stay cautious on Indian telcos and suggests any strength in the share price as an opportunity to trim positions.

If the offers from various players lead to a jump in volumes, it could be a relief but the recent trends point to a decline in both data realisation and volumes. Both are down from a time when they were doubling year-on-year every quarter, to 30-50% growth now. Data revenue growth, pegged at 22% for key players in the September quarter, could drop to 13%, given RJio’s offer, say analysts at Morgan Stanley.

The immediate trigger for the stock would the December quarter results. Analysts see Bharti’s average revenue per user to drop 7-10% on a sequential and year-to-year basis to Rs 174. This is on the back of significant share of voice and data traffic estimated to have moved to RJio as users subscribe to its services on their second SIM card.

At the current price, the stock is trading at a price-to-earnings ratio of 15 times its FY18 estimated earnings and offers better value than Idea Cellular. However, given the uncertainty on pricing strategy to be adopted by RJio after April 1, and current pricing pressures, investors will do well to sit out of the sector as of now.