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Bharti makes a stunning move!

Bharti Airtel (Bharti) has embarked on a market-testing tariff hike in Haryana and Odisha circles – and the move has just added a huge upside risk to our estimates. Company has withdrawn its offering of Rs99 recharge coupon which used to be valid for 28 days (entry pack). Now the minimum recharge pack in the two circles is priced Rs155 which offers unlimited voice, 1GB data and 300 SMSs. This is indeed a bold move and the tariff hike quantum is beyond our best-case scenario. It shows Bharti’s strong urge to drive ARPU to Rs300 (from Rs190 in Q2FY23) and that the move is not just another for the bucket-list. This is also a message / offer to competition that – Bharti is ready to walk-the-talk on tariff hikes. The development leads us to increase our EV/EBITDA multiple for the company’s India business to 11.5x FY24E (earlier: 10.5x). Accordingly, we raise our target price for the stock to Rs970 (earlier: Rs875). Upgrade to BUY (from Add). Our earlier one-notch downgrade was in fear of depleting FCF generation on 5G capex, and lower belief in likelihood of tariff hike, which has now been addressed.

What happened? Bharti has started tariff intervention in two circles – Haryana and Odisha – where it has withdrawn its minimum recharge pack of Rs99. Thus its minimum recharge now starts from Rs155. The earlier Rs99 recharge had Rs99 talk-time value and very limited data of 200MB valid for 28 days. In contrast, the now-adopted Rs155 minimum recharge gives unlimited voice, 1GB data allowance and 300 SMSs. This is a massive 57% surge in minimum recharge value, and has been done in the customer segment where affordability matters the most. With removal of Rs99 recharge pack, Bharti’s all plans now have only unlimited voice offering (same as Reliance Jio) which save customers from multiple recharges when they exhaust recharge allowance during validity period.

Bharti has thus taken a calculated risk to check how customers respond, and this pack is largely being sold to 2G customers only. It does not impact the remunerative 4G customers. Besides, peers cannot take advantage of the situation to poach its 4G customers. The Haryana and Odisha circles together contributed 4.4% of Bharti’ AGR in Q1FY23. Previously, the company did a similar exercise (market-testing) when it increased its minimum recharge offer from Rs79 to Rs99 in select circles in CY21.

Pros of large tariff hikes

* The important question that arises is: can Bharti, if competition supports, take larger tariff hike in 4G / 5G unlimited data packs where affordability is not a major issue, and the customers already enjoy huge consumption surplus?

* We are building-in much smaller tariff hikes of 5-6% pa going forward in our assumptions, and the quantum of tariff hike intention shown by Bharti through the trial in Haryana and Odisha, is beyond our best-case assumption, and means our EPS estimates have huge upside risk.

* Bharti has taken the industry’s first step in implementing a tariff hike in the current market-situation. We expect it to now wait for competitive reaction. If it does not find enough support, then Bharti may be required to restore the Rs99 pack. It would then be difficult to imagine who would take the next step for a tariff hike – and would Bharti support it? Or has Bharti ‘made an offer its competitors cannot refuse?’ In our view, YES it has!

* If the competition follows Bharti in effecting price hikes, the industry will have established a massive pricing power, which has not been seen in the past 10+ years. And this should position India telecom very differently than global telco peers who have slow-growing revenue and depressed (and falling) RoICs.

* Balance sheet deleveraging will be much faster than expected as it would boost FCF generation even if we assume telcos will invest more to improve quality of services to match the resultant higher ARPU.

Cons

* Bharti’s move will significantly hamper affordability of telecom services. The ideal situation would have been a change in tariff structure in tiered-plans where minimum recharge should not be unaffordable both for non-data and data-based offerings, though data quantity allowance should be significantly low.

* We were in favour of smaller and frequent tariff hikes vs one large tariff hike as it would allow the consumer to easily absorb the higher prices. This also would not add to inflation, which is the biggest issue being faced by most economies including India.

* Bharti’s calculated risk, if successful, will accelerate the risk of more competition / new entrants into the market. This should also significantly improve prospects for VIL.

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