Postpaid – New tariff battleground...
The rollout of postpaid tariff by the new operator has multiple ramifications for it as well as the incumbents. The plans, while at similar tariff levels of incumbents (except for base tariff that is 20% cheaper than Airtel’s offering), largely have the benefits of three major OTT (Netflix basic, Amazon Prime and Hotstar VIP) subscription as the key attraction, apart from family packs and international roaming in higher plans. We see the offering having potential to drive at least some churn from incumbents, unless they match the OTT offers. Matching of the offering, on the other hand, could result in additional annual costs to Airtel and Vodafone Idea (VIL). However, a large chunk (more than two-thirds) of postpaid category in our view, is driven by corporate connections in India (more sticky and mutual terms based). Thus, response of non-corporate segment will be key to churn. The announcement, however, puts VIL in a spot, as it would have to weather churn through cost increase as well as strive to raise tariff for survival.
Matching offerings to be additional cost for incumbents
We note that base plan offering of the new operator is at | 399, ~20% cheaper than Airtel offering (similar to prepaid pricing gap) and in line with VIL’s base plan in postpaid. While the incumbents also offer Amazon Prime one year subscription as a part of new connection offerings, incremental spending would be required for Netflix and Hotstar VIP. The post-paid base of Bharti and VIL were at 1.46 crore and 2.15 crore, as on Q1FY21, respectively. This is ~5.2% and 7.8% of their subscriber base, respectively. However, the revenue contribution, in our view, would be ~15-20%, given higher ARPU (~4-4.5x of prepaid ARPU). Therefore, this is a lucrative piece of business, which was left unchallenged by the new operator. Our back of the envelope calculations (assuming ~50% deal costs to telcos) suggest that matching of the offering to all postpaid customers base could result in additional annual costs of | 1800-2500 crore, which is ~4.2% and ~15.8% of Bharti and VIL’s annualised EBITDA, respectively. There is, however, lack of clarity on whether these OTT offerings are for one year (usually the norm) or for lifetime. Similarly, there is the higher element of corporate connections and already existing connections, which might be at lower tariff. Thus, the actual financial burden/impact of this move is difficult to ascertain.
VIL to face more pressure
Recall, VIL is already facing a cash gap, which will be aggravated from FY22 end, when spectrum and AGR dues annuity kick in. We had also mentioned that the required tariff hike to just bridge the annual cash gap would be a staggering ~92% from current levels. The current need to protect postpaid subscribers could, therefore, pressurise its cash flows further. Also, with higher proportion of postpaid base, it is more vulnerable to churn. Therefore, this move does create additional pressure on VIL survival.
Valuation & Outlook
The move creates a new layer of tariff based competition in the segment that was so far, unchallenged and lucrative. While both Airtel, VIL, are exposed to this risk of churn, the pressure on VIL will be more. The theme of prepaid tariff hike in near term also remains questionable. We await incumbent’s move before incorporating any impact in our financials and valuations. We retain BUY on Airtel with an unchanged target price of | 700/share given comfortable leverage, superior customer quality and consistent KPI. It is our top pick. We maintain SELL on VIL with an unchanged target price of | 6/share, given the difficult path ahead to assure survival.
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