After a prolonged period of pain, the Indian telecom sector has got a fresh lease of life, thanks to the recent unprecedented tariff hikes and the government's efforts to revive profitability, a brokerage firm report said on Tuesday.
"We believe the recent tariff hike is a beginning of trend reversal with more price hikes to come in 2020. The incremental price hike is a function of support for VIL (Vodafone Idea Ltd) and the needed profitability boost to RJio and Bharti. This could be a turning point for the industry, wherein incremental capital commitment would decline with players agreeing on better tariffs," a Motilal Oswal report said.
"With the recent positive developments in the industry and potential trigger points, we believe that the sector offers strong operating, financial and valuation leverage. While Vodafone Idea would need more measures for its survival, RJio and Bharti stand to benefit significantly from further relief measures", it said.
The brokerage said that to address the risk of the looming adjusted gross revenue (AGR) liabilities and to alleviate the financial stress, telecom companies have announced strong 25 per cent average revenue per user (ARPU) increase, which should add Rs 293 billion/Rs 190 billion to the industry's overall revenue and EBITDA (earning before interest, tax, amortisation and depreciation) in 2020-21.
"However, given the second sim card phenomenon, we estimate there could be 20-30 per cent leakage (partly factored in), which could be more pronounced for weaker players due to the risk of customers retracting back to the primary sim (and thus, reduce their subscriber base)", it added.
According to the report, RJio has the highest share of smartphone devices (estimated at 79 per cent), and, therefore, could see the highest gain.
On a second quarter 2019-20 annualised basis, Bharti's consolidated revenue/EBITDA can rise by Rs 112 billion/Rs 81 billion, while RJio's revenue/EBITDA should increase by Rs 133 billion/Rs 96 billion, it said.
VIL is likely to see the highest operating leverage given its lowest EBITDA margin, and subsequently its revenue/EBITDA should increase by Rs 102 billion/Rs 74 billion, it added.
Telecpm companies have devised price plans in a manner where there is limited risk of downtrading, as data volume offerings have reduced by over 90 per cent for the base plan, which is priced 25 per cent lower.
Besides, the industry ARPU increase was hinged on three key triggers - ballooning leverage, negative free cash flow, and "reducing network/pricing arbitrage". This had led to slowing subscriber churn and limited growth opportunities, thus compelling telcos to keep ARPUs on a growing trajectory, the report said.
"To resolve the telecom industry's near-term cash flow issues and to alleviate financial stress, the government is exploring (a) telcos plea of offering moratorium for AGR liability and the possible reduction in penalty and interest, (b) GST input tax credits of Rs 80-90 billion for Bharti/VIL, (c) reduction of the current UFO obligation, which stands at 5 per cent, thus reducing license/spectrum fee to 5-6 per cent from the current 12 per cent" it said.
However, these could be long-drawn processes as approval of the GST Council and the Finance Ministry is needed, it added.
Also, TRAI has decided to continue with the current regime of interconnection usage charges (IUC) of Rs 0.06/minute until December 2020 and defer the zero charges to January 2021, "which would benefit Bharti/VIL by Rs 10 billion/Rs 13 billion," the report noted.