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While the telecom sector is witnessing increasing competitive intensity that indicates delay in tariff hike, we believe this is a good opportunity for long-term investment. We expect ARPU to improve for telcos, aided by: i) mix change, as 2G users shift to 4G/5G; and ii) tariff hike by FY25. Postpaid and Broadband may emerge as the next battleground, entailing a slew of new plans by RJio and Airtel aimed at gaining market share. With RJio and Bharti Airtel intent on garnering overall market share, Vi may see collateral damage with need for a steep tariff hike of 85%/122% by FY26/FY27 to meet its cash shortfall. We see increasing risk of a duopoly, which will add option value of Rs90/Rs80 per share for Bharti Airtel/RIL. We favor Bharti Airtel and RJio (RIL), while we see pressure on Vi and Indus Towers amid delays in tariff hike.

ARPU to further improve, for Indian telcos

We expect ARPU to improve for telcos, aided by: i) mix change, with subscriber shift from 2G to 4G/5G; and ii) tariff hike by FY25. We see possibility of tariff hikes, as: a) telcos need them to recover 5G investment and improve returns; and b) a moderate tariff hike is unlikely to alleviate the cash constraint for Vi. Vi requires a steeper tariff hike, of 45% by FY26 and 64% by FY27, even after assuming modest capex and further conversion of dues into equity by the GoI. We see low possibility of a tariff hike in FY24, due to: i) elections in 2024; ii) increase in competitive intensity for market-share gains, with launch of new plans. In the long run, we see increasing per-capita income supporting a proportional ARPU increase for telcos in India.

Competition, aimed at gaining market share, to persist

Pockets of competitive intensity still exist, as RJio offers attractive plans vs. competitors. We expect market-share gains for RJio and Bharti Airtel vs. Vi, as: i) Vi has cut down on capex spend amid funding delays; ii) Vi’s rollout of 5G is being delayed. Postpaid may emerge as the next battleground, with a slew of new plans. Also, launch of new Broadband plans by RJio, priced at Rs198/month, aim at making inroads into the Rs157bn DTH market as well as the Rs181bn cable market, while cementing RJio’s dominance in the Rs214bn Home broadband market. With RJio and Bharti Airtel targeting overall market-share gains, Vi may be collateral damage as it is likely to continue losing subscribers amid lower capex and 5G launch delays.

Option value for Vi’s loss of market share

Vi is likely to face funding shortfall of ~Rs250bn in FY26 and ~Rs360bn in FY27; it will thus require steep tariff hike of 85% and 122%, respectively, to meet such a shortfall. Further, conversion of installments into equity (~Rs174bnpa) by the GoI will still leave a shortfall of Rs135bn in FY26 and Rs190bn in FY27, requiring tariff hike of 45% and 64%, respectively, and lead to huge dilution for Vi’s minority shareholders. Cash crunch for Vi is limiting its ability to do capex, worsening its position. Our analysis slows that Bharti Airtel and RJio capturing 40% each of Vi’s revenue with 60% probability of a duopoly will translate into option value of Rs90 per share for Bharti Airtel and Rs80 per share for RIL.

We prefer Bharti Airtel and RJio (RIL)

We expect Bharti Airtel to benefit from: i) the 5G launch, with subscriber gain from Vi; ii) robust growth in the Homes, Enterprise and Africa businesses (FY22-25E CAGR of 25%, 14% and 14%, respectively). We initiate coverage on Bharti Airtel with a BUY and SOTP-based TP of Rs920/share. RJio would gain market share via rollout of 5G and competitive pricing of its prepaid plans, while its new Home broadband plan would help make inroads into the Rs157bn DTH market and the Rs181bn cable market. For Indus Towers, we see challenges: i) its key client Vi is seeing a cash crunch; ii) it faces increasing competition. We initiate coverage on Indus Towers with a HOLD and TP of Rs160/sh. Vi has been plagued with concerns on: i) reducing subscriber/revenue share; i) weakening KPI; iii) increasing debt; iv) fund crunch leading to reduced capex. We initiate coverage on Vi with ‘No Rating’, amid the risk of a duopoly.

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