Telecom crisis: Brokerages expect around 15% hike in tariffs for Vodafone, Bharti Airtel customers from December

Customers of Vodafone Idea and Bharti Airtel must now brace themselves with higher mobile phone bills come next month. The telecom sector is facing a crisis faced with intense competition and unprecedented statutory dues.

Brokerages weighed in on what this announcement meant:

Ahead-of-the-event press releases, without specifics, on price increases is a first-of-its-kind development in the sector, if our memory serves us right, said analysts at Kotak Institutional Equities.

"The event gains significance in the backdrop of the vocal relief demands from both the companies after the recent adverse Supreme Court judgment on the AGR case. One of the key demands, we note, has been a regulated floor on pricing. Bharti’s indication of a potential consultation (on pricing rationality) is interesting in this context. We do note that TRAI’s final decision on IUC (move to zero or extension of the 6 paise/min regime) is still awaited. Price increase announcements by Bharti and Vodafone Idea Ltd suggest that the two companies expect an extension, in our view. An extension would mean Jio does not roll back the price increases it took recently. This would mean increased degrees of freedom on pricing for Bharti and Vodafone Idea, in our view," the brokerage said.

Representative image. Reuters

Bharti Airtel and Vodafone Idea on Monday announced hike in a mobile phone call and data charges from December saying the increase was warranted for the viability of their business.

Analysts at Motilal Oswal Institutional Research said according to their assessment there is a possibility of 15 percent hike by Vodafone Idea (VIL) and Bharti Airtel in order to go back to the same premium as it used to enjoy over Reliance Jio. For both Vodafone Idea and Bharti Airtel, the hike will be on 45 percent of their customers (non-feature phones) or 70 percent of their revenue. For Bharti it will be on 40 percent of consolidated EBITDA. This hike on the above revenue and assuming 70 percent EBIDTA margins on incremental revenues could mean a 50-60 percent increase in EBIDTA for both.

For Vodafone Idea, the analysts at Motilal Oswal said: "Though the percentage jump might look steep however on a low base of Rs 4,000 crore EBIDTA (2QFY20 annualised) and in the context of debt of Rs 1.2 lakh crore would change little to manage its capex and interest cost requirement! For Bharti, the above calculation on a consol basis could mean 25 percent estimated jump in EBIDTA estimates which for a FCF positive company should further aid valuations."

Announcement of raising tariffs

First, Vodafone Idea in a statement announced plans to raise tariffs for the first time in three years only to be followed by a similarly worded statement minutes later from Airtel.

The two did not quantify the increase in rates but said that the hike will be effective beginning next month. To ensure that its customers continue to enjoy world-class digital experiences, Vodafone Idea will suitably increase the prices of its tariffs effective 1 December, 2019," Vodafone Idea said.

The telecom sector is highly capital intensive with fast-changing technology cycles that require continuing investments, Bharti Airtel said.

"It is, therefore, extremely important that the industry remains viable to support the vision of Digital India. Accordingly, Airtel will appropriately increase price offerings in the month beginning December," it added.

Telecom crisis

Airtel and Vodafone Idea had posted a combined loss of Rs 74,000 crore in Q2 by provisioning for the AGR pending dues. Vodafone has hinted at not being able to remain as a going concern if relief does not come for the sector.

The Supreme Court late last month upheld a DoT demand that telcos clear their adjusted gross revenue (AGR) dues, a share of which has to be paid as licence and spectrum fee to the exchequer. Following the order, both Bharti Airtel and Vodafone Idea last posted massive net losses while provisioning the payments of these dues.

According to the Telecom Regulatory Authority of India, prices of mobile data have fallen drastically by about 95 percent to Rs 11.78 per gigabyte (GB).

Mobile calling rates dipped by about 60 percent to about 19 paise per minute between June 2016-December 2017.

Promoter firm Vodafone, which holds a majority stake of 45.39 percent in Vodafone Idea, has said that the group will not infuse any further equity investment in the Indian telecom venture and reportedly similar stand has been taken by the Aditya Birla Group. This leaves the company with no other option but to support operations from internal resources.

Vodafone Idea said it has the largest spectrum footprint and by accelerating its network integration, the company is rapidly expanding both its coverage and capacity and is well on track to offer 4G services to 1 billion Indian citizens by March 2020.

"VIL will continue to actively invest in making its network future-fit by embedding new-age technologies and launching new products/services to cater to the evolving needs of its over 300 million customers," the statement said.

Dismissing rumours of its exit from the Indian market, Vodafone Idea CEO Ravinder Takkar last week had said the government is clear that there would be no duopoly and it is in the process of filing a review petition.

(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Firstpost)