Tariff Hikes to drive Telecom Sector Growth in Q2: Analysts

In a note, Jefferies said that India's telecom sector will grow starting Q2 following recent tariff hikes from Bharti Airtel and Vodafone Idea.

Tariff Hikes to Propel Growth in Telecom Sector

Bharti Airtel CEO Gopal Vittal recently said that the recent tariff hike for prepaid and postpaid services represents a "small step" in the direction to increase ARPUs to Rs 200 and eventually to Rs 300. He said that the telco has been facing low return on capital as ARPUs keep shrinking.

On the other hand, the launch of the JioPhone Next on 10th September might slow down tariff hikes, BoFA Securities said. It added that it expects Vodafone Idea's weak business momentum will continue given that, and churn on back of tariff hikes and limited capex investments.

Jefferies said, "we see two key themes playing out in Indian telcos over the next few months. First, sector revenue growth will pick up led by tariff hikes from Bharti/VIL. Second, while the upcoming launch of JioPhone Next may cause delays in further tariff hikes, VIL's stretched balance sheet will likely accelerate the pace of market share shifts towards Bharti/Jio and may lead to relief measures from the government".

It added that Vodafone Idea's fragile state will likely ensure market share shifts towards Airtel and Jio. Incidentally, during Q1FY22, aggregate revenue growth for the top-3 operators moderated to 1% sequentially. On one hand, Reliance Jio reported a revenue growth of 4%, while Vodafone Idea recorded a 5% decline sequentially. Bharti Airtel showed resilience with its 2% sequential revenue growth. Jefferies said that while sector revenues have grown 40% from trough levels in FY19 and have recovered, growth has moderated.

Vodafone Idea recorded low operating metrics with fall in 4G, postpaid and voice users. Its data traffic growth was also the weakest in the segment with 13%, compared with Airtel's 17% and Jio's 22%.

In Q1FY22, aggregate EBITDA for the top-3 operators grew 2% QoQ. This was only slightly above 1% QoQ revenue growth, resulting in 30 bps margin expansion to 46%. Reliance Jio continues to see limited benefits of operating leverage resulting in flat margins despite healthy 4% QoQ revenue growth. However, Voda-Idea's 26% EBITDA decline in 1Q was due to a sharp revenue decline.