Telecom Operators Need Price Hikes To Justify 5G Spending, Phone Subsidies: Deutsche Bank
India’s telecom sector needs concrete price hikes to justify 5G spending and subsidised mobile handsets, according to Deutsche Bank.
The government is also likely keen to get prices up given that it made major concessions during the quarter ended September to retain the three private operators in the market, the investment bank and financial services provider said in a statement.
Pricing remained weak as average revenue per user fell between 1% and 8% year-on-year for Reliance Jio Infocomm Ltd., Bharti Airtel Ltd. and Vodafone Idea Ltd. during the quarter, but improved sequentially. Regular prepaid plans, the report said, are due for a lift and now that Diwali is over it may be an appropriate time.
Reliance Jio suffered an outsized impact during Covid-19 lockdowns that constrained spending and drove SIM consolidation—contraction in the number of mobile connections. The Mukesh Ambani-led carrier lost 1.1 crore subscribers in the second quarter. “It’s getting more expensive for Jio to chase incremental subscribers, and the harder that gets, the more likely it will want to lift industry pricing,” the report said.
Vi lost 20 lakh users but its loss rate improved, reflecting the brand having been stabilised. Bharti Airtel, however, added 20 lakh subscribers during the quarter.
Reliance’s JioPhone Next launch is expected to spur additional demand, though the cost benefit of the seemingly expensive device may disappoint Jio, the report said. Bharti Airtel, however, has launched Rs 6,000 cashback on around 170 handsets.
Deutsche Bank cut net profit estimates for Bharti Airtel by 15% and 12% for FY22 and FY23, respectively, after including the impact of phone subsidies.
“Every 10 lakh users taking up such an offer costs Bharti Airtel Rs 600 crore or (Rs 200 crore per year) given the 36-month continuous use rule,” it said. “Users need to pay at least Rs 249 a month, but at that level, they would get Rs 167 a month in handset rebates. This is likely to be painful.”
The report expects 5G auctions to occur after May next year. “It would seem important to cut the reserve price of spectrum from an extreme level, and wait for Vi to announce its funding plan prior to launching an auction,” it said. “Should the Supreme Court review the highlighted calculation errors suggested by operators in calculating AGR (adjusted gross revenue) dues, that would also help fund 5G.”
Indus Towers Ltd. remains the top pick of Deutsche Bank with a target price of Rs 400, implying an upside potential of 35.2%. That’s because the company’s key client Vi now appears to have at least a four-year window to recapitalise, allowing Indus to work on rebalancing its own business model to appeal to all operators.
Deutsche Bank suggests a ‘buy’ on Bharti Airtel with a target price of Rs 800, an upside potential of 9.6%. It has a ‘sell’ rating on Vi with a price target of Rs 10 apiece.
Bharti Airtel: Competitive risk being greater than expected in terms of price rises and Vi being recapitalised, prolonging the era of fierce competition.
Indus Towers: Failure of Vi will lead to cutting of an estimated 40% of revenue, or that pricing for multi-tenant towers eventually gets cut to attract other operators to use its towers more.
Vodafone Idea: A substantial government support, such as a floor price, and operators in the sector allowing a repricing upwards to drive ARPU beyond Deutsche Bank’s forecast.