India’s freeze on repayment of dues is unlikely to drive a rally for telecom stocks even as the relief will aid the financial health of operators by providing near-term cash flow, according to UBS.
The research firm downgraded Bharti Airtel Ltd. to ‘neutral’ as Vodafone Idea’s survival has removed one near-term potential trigger for the stock, according to its note. The brokerage retained ‘neutral’ outlook on Vodafone Idea or Vi.
The union cabinet has allowed a four-year moratorium on repayment of statutory and spectrum dues. Operators availing the benefit, however, will have to pay interest starting Oct. 1. Other measures include a prospective change in the definition of adjusted gross revenue.
That relief was vital for the survival of Vi as liabilities had pushed it to the brink. The freeze also frees capital for the sector set back by a crippling tariff war and statutory payments.
The moratorium will improve operating margins for operators, UBS said. But Vi will still have to raise capital, it said.
Telecom Savings That UBS Estimates
Rs 400-500 crore: Yearly savings from reduction of bank guarantees.
100 basis points: Improvement in Ebitda margins in the medium term from rationalisation in AGR definition.
300-400 basis points: Improvement in margins as spectrum payments will shift revenue towards 5G.
However, the risk-reward for the sector is balanced given the impending JioPhone Next launch, continued delays in the industry's ability to increase tariffs and upcoming 5G auctions, according to UBS. The prompted the research firm to revise earnings and price targets for telecom firms.
Vodafone Idea
The four-year moratorium on spectrum and AGR payments will provide a near-term cash flow of Rs 10,000 crore, after factoring in debt repayments.
Therefore, fundraise remains critical for the company to stabilise operations, UBS said, adding that the company will require capital for investments in 5G infrastructure.
Maintains neutral stance on Vi
Increased price target from Rs 10 to Rs 12.3.
Bharti Airtel
The moratorium will help Bharti Airtel to build a stronger war chest for capex and spectrum, especially since 5G is around the corner, UBS said.
UBS increased the revenue and operating income estimates by 3-6% for FY22-23E and 8-15% in the medium term.
Post the recent stock rally, the valuations at eight times the FY23 enterprise -Ebitda multiple appear fair.
A VIL exit, which would have been a positive trigger for the stock, is no longer available at least in the short term.
Downgrades Bharti Airtel from ‘buy’ to ‘neutral’
Increase target price to Rs 760, implying an upside potential of 10.4%.
Indus Towers
VIL's complete exit from the market could have adversely impacted Indus Tower’s revenue and Ebitda by 30-40%, UBS said.
Given the recent stock rally, UBS estimates the free cash flow yield of around 8%, which is unattractive.
Downgraded from ‘neutral’ to ‘sell’.
Target price of Rs 275, implying a downside of 10.9%.
ARPU Outlook
UBS expects a gradual increase in industry average revenue per user from Rs 129 in FY21 to Rs 196 in FY26. That will limit an immediate earnings upgrade, it said.
Factors such as 2G to 4G migration can help a 4-6% annual increase in ARPU but tariff increases are needed for faster growth, it said. With Jio still looking to take market share through the JioPhone Next launch and given the weak macro environment, the industry’s ability to raise prices remains debatable, it said.
“While India's mobile revenue as a percentage of GDP is below other emerging markets, the base data plan prices are not significantly cheaper,” UBS said. A reduction in data allowances is needed for long-term data monetisation, it said.
UBS expects revenue market share stabilising at 45%, 33%, and 18% for Reliance Jio, Bharti Airtel, and Vi by FY24.
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