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Tariff hike - A shot in the arm!
All three private telecom operators (telcos) have announced a tariff hike across plans, thereby ending the era of price competition. Both Bharti Airtel (Airtel) and Vodafone Idea (VIL) have raised tariffs by ~15-47% across packs while Jio has indicated that it will raise tariff by “up to 40%”, albeit provide 300% more benefits. The hike in tariff is likely to translate into FY21E revenue, EBITDA upgrade of ~17%, 35% and 9%, 17% for VIL and Airtel, respectively. While the AGR related payout pain remains, we note that telcos have filed a review petition in the Supreme Court. A respite from court or government in the form of allaying of payout (through interest, penalty waiver, etc) or staggering the same over several years thereof, will be a key catalyst. Moreover, we also believe VIL like Airtel, which has announced willingness to raise funds (debt/equity or both), would require a fund infusion to meet AGR dues, if demanded. We maintain BUY on Airtel with a revised target price of | 550/share. Also, we assign a BUY rating on VIL with a target price of | 9/share. We also raise our target multiple for Bharti Infratel to 7x (vs. 6.5x earlier) and assign HOLD with a revised target price of | 295/share, with the possibility of a better industry construct emerging.
Popular packs witness 25-41% price hikes
We note that popular plans (offering bundled data of 1.5-2 GB data daily) have undergone ~25-41% price hikes. Apart from the tariff hike, the companies have rationalised their plans thereby offering lower number of plans now. They have also kept the data offering very low at the entry level plans (effectively 2 GB for 28 days) vs. popular plans, which offer 1.5- 2GB/data daily. This, we believe, will discourage downtrading given the relative unattractive value proposition. We note that while Jio’s statement of raising tariff by “up to 40%”, implies that price repair has begun, a clear relative pricing will only be known when details of the same emerge.
Airtel readies for fund raise; VIL to need it too
Bharti Airtel’s board will meet on December 4 to consider multiple options for raising funds, including equity and debt instruments. While the quantum is yet to be stated, media reports indicate that it is likely to raise ~US$3 billion. We believe that the same is to meet the AGR dues demand within the stipulated time in case there is no relief from the Supreme Court/government. The fund raising intention, however, assures that Bharti will survive given the availability of funds coupled with price hike. Similarly, we believe that Vodafone’s survival also hinges on a further price hike of similar quantum and either of fund infusion or meaningful respite from court/government in the form of allaying of AGR payout (through interest, penalty waiver, etc.) or staggering the same over several years thereof.
Valuation & Outlook
We continue to maintain BUY on Airtel with a revised TP of | 550/share, given its relative superior standing and comfortable balance sheet position. For VIL, we continue to believe this price hike is just part of relief and further respite in AGR payout (waiver or payment terms) as well as fund infusion will be key. We now assign a BUY rating on VIL (vs. UNDER REVIEW, earlier) with a TP of | 9/share. Our rating is in the belief that the government’s intent and comment on industry implies more measures will be seen, thereby keeping VIL afloat. We also raise our target multiple for Bharti Infratel to 7x (vs. 6.5x earlier) and assign a HOLD rating with a revised TP of | 295/share, with the possibility of a better industry construct emerging. Airtel is our preferred pick in the telecom space, given the relatively superior metrics.
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