Reliance Jio IPO To 5G Auction — CLSA On What 2022 May Hold For Telecom

A possible initial public offering of Reliance Jio Infocomm Ltd, auction of 5G spectrum, tariff hikes and more — 2022 could be a year of big events for the telecom industry, said CLSA in a report dated Jan.5.

"2022 will have three key trends in India mobile," the brokerage house wrote. First, sector revenues would grow again, after growing 15% over a year ago in 2021. Tariff hikes and rising 4G data adoption is expected to drive 13% sector compounded annual revenue growth for the sector by FY24. Second, after the relief package brought in to avert a financial crisis at Vodafone, AGR dues petitions filed by incumbents could come up for review. Third, the transition to 5G will commence in 2022.

According to CLSA, 2022 could possibly see an IPO or a separate listing of Jio, following the 33% pre-IPO stake sales to 13 mobile and fixed-line businesses, along with its apps, digital investments and tech capabilities.

Should a separate listing for Jio happen, it could prove to be a catalyst for the sector.

"We believe likely R-Jio IPO will be a sector valuation catalyst with leader’s pre-IPO $20 billion deals valuation itself at 10x EV/Ebitda," CLSA said. EV/Ebitda is the ratio of enterprise value to earnings before interest, tax, depreciation and amortisation. It a commonly used metric to value companies.

Jio's EV-to-Ebitda ratio, according to CLSA, is well ahead of the 25% discount to the ratio that Bharti Airtel Ltd. trades at.

CLSA also expects the transition towards 5G to commence this year.

However, the brokerage said that 5G auctions will only become a success if auction price is cut from the "exorbitant" $7 billion/100MHz for pan-India in the 3.3-3.6GHz band.

"Especially post Covid-19, consumers and enterprises have greater need for enhanced broadband connectivity, remote access and new services," said CLSA. Beyond enhanced 5G mobile services and new use cases, fixed wireless access is a 5G service whose business case has improved post Covid-19, the report added.

2022 will also likely see higher sector revenues growth due to tariff hikes and rising 4G data adoption.

This could lead to 13% compounded annual sector revenue growth by FY24 to $34 billion. This will be after 15% growth witnessed in 2021. These estimates factor in a cumulative 20% in tariff hikes over the second half of the ongoing financial year (2022) to FY24, CLSA said.

"Amidst all this, RJio is expected to continue as a leading operator with 44% share by FY24 but Bharti’s 34% share led by stellar execution is expected to have a surprising potential upside," the report said.

CLSA also expects decisions on the AGR review petitions filed by incumbent players.

Based on detailed self-assessment of AGR dues, Bharti has paid Rs 18,000 crore ($2.5 billion) and Vi or Vodafone Idea has paid Rs 7,900 crore ($1.1 billion).

"The operators have filed review petitions in the Supreme Court and if review is allowed and is in line with the self-assessments done by the operators, it will amount to $4.2 billion savings for Bharti and higher $5 billion for Vodafone Idea," said the brokerage.

Bharti Airtel is CLSA’s top pick in the sector.

The stock in 2021 was up 35%, outperforming the benchmark by 12% with creditable market-share, CLSA said. The brokerage has retained buy rating on the stock with a target price of Rs 910, higher than the previous target price of Rs 863.