Major Indian telecom operators are anticipated to achieve ~25 percent growth in EBITDA for FY25 following tariff hikes ranging from 15-20 percent, says Tanmay Gupta, analyst at Motilal Oswal Financial Services.
Jio Leads with a 19 percent hike, followed by Airtel and Vodafone Idea
Reliance Jio (Jio) spearheaded the tariff increase with an average hike of ~19 percent, followed closely by Bharti Airtel and Vodafone Idea, which implemented hikes of ~15 percent and ~16 percent respectively. All three companies have increased tariffs across both prepaid and postpaid plans, though Jio did not raise rates for its JioBharat/JioPhone users.
Details of Tariff Adjustments
Airtel and VI: To minimize subscriber churn in the 2G segment, both Airtel and Vodafone Idea adopted modest hikes of ~11 percent in entry-level plans, while increasing popular plan rates by 17-18 percent, compared to Jio’s ~19 percent.
Expected ARPU Growth: The price adjustments are projected to raise the exit Average Revenue Per User (ARPU) in FY25 by 17 percent for Jio (INR 213), 20 percent for Airtel (INR 251), and 20 percent for Vodafone Idea (INR 175). This ARPU growth, spread over 2-3 quarters, is expected to translate into EBITDA increases of 26 percent for Jio, 24 percent for Airtel, and 26 percent for Vodafone Idea.
Market Impact and Projections
The recent tariff hikes, the first in two years, are seen as a positive development for the telecom sector. The adjustments are expected to ease financial pressures on Vodafone Idea and improve return ratios for Airtel and Jio. However, the higher tariffs, coupled with an increased mobile number portability (MNP) rate of 11-12 percent, might lead to some down-trading and SIM consolidation.
Stock Catalysts and Recommendations
Post-tariff hike, the primary catalysts for telecom stocks are expected to include subscriber gains, reduced churn, 5G adoption, and an increase in data customers. Analysts continue to favor Jio and Airtel with a target price (TP) of INR 1,680, while maintaining a Neutral rating on Vodafone Idea with a TP of INR 18.
Plan Comparisons Post-Hike
Entry-Level Plans: Airtel and VI have narrowed the pricing gap with RJio in entry-level plans from ~15 percent to ~5 percent.
Popular Plans: In prepaid popular daily plans, the price gap between Airtel / Vodafone Idea and Jio remains unchanged at 8-10 percent.
Postpaid Plans: Airtel and VODAFONE IDEA have aligned their postpaid plan hikes with RJio, maintaining the existing price gap.
New Offerings and Strategic Moves
Starting July 3, 2024, Jio will launch two new services:
JioSafe: A quantum-secure communications app for calling, messaging, and file transfer, priced at INR 199/month.
JioTranslate: An AI-powered multilingual communication app for translating voice calls, messages, texts, and images, priced at INR 99/month.
Projected Financials for FY25
Jio: A 19 percent tariff hike is expected to lead to a 17 percent increase in FY25 exit ARPU (INR 213), resulting in incremental revenue/EBITDA of INR 198 billion/INR 136 billion, factoring a 69 percent incremental EBITDA margin.
Airtel: A 15 percent hike along with organic ARPU growth is anticipated to increase FY25 exit ARPU by 20 percent (INR 251), translating to incremental revenue/EBITDA of INR 147 billion/INR 110 billion, with a 75 percent incremental EBITDA margin.
Vodafone Idea: A 16 percent hike with organic ARPU growth is projected to raise FY25 exit ARPU by 20 percent (INR 175), resulting in incremental revenue/EBITDA of INR 31 billion/INR 22 billion, factoring a 70 percent incremental EBITDA margin.
Individual Company Insights
Bharti Airtel: The company is well-positioned to benefit from sector tailwinds due to market share gains, improved ARPU driven by customer premiumization, and non-wireless segments such as Home and Enterprise. Management expects FY25 capex to moderate, with cash flow generation deemed sufficient for capex and deleveraging.
Reliance Jio: Jio continues to offer the most affordable plans among peers, supported by its extensive spectrum and quality services. The company is expected to see subscriber gains and improved ARPU following the tariff hikes, especially with unchanged rates for JioPhone/JioBharat users.
Vodafone Idea: The tariff hikes provide a much-needed breather for Vodafone Idea, potentially boosting its EBITDA CAGR for FY24-26 to 17 percent. However, the company’s significant debt and insufficient EBITDA to meet annual obligations limit its prospects for creating a self-sustainable cash flow position. The upcoming fund raise and 4G/5G rollout capex will be crucial.