Published on 2/07/2020 4:50:23 PM | Source: Motilal Oswal Financial Services Ltd

Telecom Industry returning to healthy monetization; tariff hike needed across players: MOFSL

Posted in Broking Firm Views - Sector Report| #Telecom Sector #Sector Report #Motilal Oswal Financial Services Ltd

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After more than 12-13 years, the telecom industry is once again in a sweet spot. It is returning to a healthy monetization stage thanks to reduced capex due to the end of the heavy investment cycle of the last 10 years coupled with EBITDA growth, as per a report by Motilal Oswal Financial Services. Thus, Bharti’s FCF yield is expected at 7% and RJio’s RoCE at ~11% in FY22E. The expected tariff hikes of >50% over the next few years may bring Bharti and RJio’s RoCE above the cost of capital for the first time in 10 years. However, VIL needs >50% price hike to overcome the challenge of declining market share, high cost structure coupled with steep leverage.

In a recent discussion with the TRAI secretary, MOFSL learnt that the Consultation Paper on floor pricing is on their priority list; a decision will be taken soon post the open house discussion. The secretary also stated that TRAI has received recommendations from different stakeholders. While telcos are inclined toward some minimum fixed floor prices for data services, consumers and other stake holders have a contrasting view. Furthermore, he also emphasized on the importance of the forbearance policy and indicated that telcos have all options to increase tariffs under the current guidelines and could also customize different plans at various prices to increase their top line. Thus, it appeared that the secretary hinted at leaving it to telcos to decide on pricing instead of a floor price driven price increase.

Sharing below the detailed rationale of why each player needs to hike tariff:

VIL needs it to survive: VIL’s weak cash position with outstanding cash and cash equivalents of INR26.6b in FY20 and EBITDA (pre Ind-AS 116) of INR58.1b would be insufficient to service its estimated cash requirement of ~INR135b for FY21/22E.

Also, VIL cash requirement would be ~INR300b for FY23E and beyond (as the 2-year deferred spectrum payment moratorium ends). Therefore, VIL would need price increase of 50% to keep it afloat (assuming limited bank refinancing and subscriber churn).


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