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Finally tariff hike in key segments

Bharti Airtel (Bharti) has announced a 20–25% tariff hike across its prepaid data plans, which constitute 60–70% of revenue. We expect other players to follow suit. While we were building in tariff hikes for FY23, this tariff hike removes an overhang earlier than expected.

The tariff hikes augur well for the industry, and can potentially help Vodafone Idea (VI) raise capital to repay near-term debt obligation. However, for long-term sustainability, VI requires ARPU to nearly double over the next three–four years. As we were already factoring in a tariff hike, the increase in Bharti’s and VI’s FY23E revenue is only 1.7% each. Due to high operating leverage, our updated TP for Bharti is now INR866 (earlier INR848) and for VI INR7 (earlier INR6).

Tariff hikes baked in

The 4G pre-paid segment is the most competitive segment of the telecom industry constituting 60–70% of the revenue pool for the industry. While we were building in an ARPU increase in FY23, these hikes will mean ARPU hikes are front-ended, leading to a 1.7% increase in FY23 revenue for both Bharti and VI. Due to operating leverage, EBITDA impact is 2.8% and 3.3%, respectively. This announcement provides certainty to our assumptions. We are not building in a major tariff increase after this hike; even so, further consistent tariff hikes imply upside risk to our estimates.

Other players likely to follow suit

We expect, after Bharti’s tariff hike announcement, other competitors to follow suit—like the previous cycle in Dec-19. While there is a case for operators to not raise tariffs due to market share aspirations, we believe the government is resolute to ensure three private players industry, and that will weigh on decision making. Accordingly, there is a low probability of other operators not following. VI will be the key beneficiary of potential tariff hike as it will be able to arrest the subscriber decline by increasing investment in network. We expect tariff hike to also help VI raise capital to repay INR60bn towards NCD over the next four months.

Outlook and valuation:

A step in right direction While we were building in tariff hikes in our estimates, the magnitude of this hike leads us to increase our EBITDA estimates for both Bharti and VI’s revenue by 1.7% each. Consequently, our TP for Bharti increases to INR866 and for VI to INR7. Bharti and VI are trading at 7.4x and 11.1x FY23E EV/EBITDA, respectively.

Despite the tariff hikes, industry’s APRU levels are still well below the FY16 levels when new telecom operators launched with aggressive tariff. Considering data consumption, and suboptimal RoCE of all telecom operators, it can still move up meaningfully from these levels. For VI, while we believe that this proposed tariff hike would be a step in the right direction, the company would still require its ARPU to double over the next three–four years to meet its debt obligation of INR1.9tn.

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