Tariff hike to boost revenues of telecom firms by 15%; Citi upgrades Vi to buy

Indian telecom firms could see their revenues rise by nearly 15%, buoyed by the recent tariff hike that is likely to be well-absorbed by the market, and the impact would become visible in their December-quarter financials, brokerage IIFL Securities said on Monday.

“Considering some down-trading and potential SIM consolidation, we expect overall revenue boost from these tariff hikes to be in the range of 14-15%. We expect the tariff hike to fully reflect in telcos’ numbers by 3QFY25,” the brokerage said in a note. The effect may take longer for Reliance Jio, since it has a higher proportion of customers on longer-duration packs.

Consolidation of SIM, or subscriber identity module, refers to reduction in the number of mobile connections by customers usually on account of high tariffs.

With 5G monetisation beginning with the latest round of tariff hike, the visibility of future tariff hikes has improved, which is a big positive for the sector that has reeled from brutal price wars for several years. The shift towards 5G monetisation has been started by market leader Reliance Jio, which means that peak competitive intensity has passed and tariff hikes that maybe higher than expected can take place as early as next year.

Read more: Phone tariff hikes: Is this the end of cheap data?

Thanks to these factors, Citi Research upgraded Vodafone Idea to ‘buy’ from ‘neutral’ and raised its share target price by 50% even as it may face subscriber loss as it is yet to commercially launch 5G service and expand 4G coverage. “We upgrade VI from Neutral to Buy whilst retaining our High Risk rating, with a new TP of ₹23 (vs ₹15),” Citi Research said in a note.

It said that further upside for Vi shares could come from the company's ability to get loans from banks, additional equity infusion of about ₹2,000 crore from Vodafone Plc’s 3% residual stake sale in Indus Towers that can be used to partly clear its past dues to Indus, and the pending curative petition on adjusted gross revenue in the Supreme Court.

HSBC Global Research raised the target price of the stock to ₹24 from ₹7, but maintained its rating of ‘Reduce’ due to high leverage of 11.7x net debt to earnings before interest, tax, depreciation and amortisation.

The brokerages’ upbeat views follow Reliance Jio’s tariff hike by 12-25% and Bharti Airtel and Vodafone Idea raising them by 10-23%, effective Wednesday, 3 July. Tariffs were last raised in December 2019 and then in November 2021.

Read more: New telecom law gets partially notified. What next?

Analysts at Axis Capital expect customers to see an incremental outflow of ₹45,600 crore in the next 12 months owing to the hike, but that would not hurt overall household spend. “With telecom weight of 1.84 in inflation and expected incremental inflow at just ~18% over FY24 telecom revenue, we do not expect a meaningful impact on inflation,” it noted.

It further said that for urban households, the spend on entry-level 4G tariffs will increase from 2.7% in FY24 to 2.8% in FY25. For rural households, the spend goes up from 4.5% to 4.7% in FY25.

The tariff hikes were needed as the return on capital employed for the sector remains low at 9.5%. Bharti Airtel and Reliance Jio have together invested ₹1.5 trillion to deploy 5G services, which face monetization challenges due to lack of use cases.

“We see the restart of the tariff repair cycle as a positive and expect the 11-20% hike in one go to provide time for the hike to be absorbed by subscribers and keep options open for another hike at the end of CY25,” said analysts at JP Morgan.

Read more: Vi gets fewer consumer complaints, aims to bolster customer retention

It added that with declining capex expected from this financial year onwards and expanding cash flows, telcos like Airtel would focus on sharp deleveraging and stronger ability to pay meaningful dividends.

“We continue to remain optimistic on another round of tariff hike in next 12 months. Any potential IPO of Jio (as highlighted by RIL management) in future could also be sentimentally positive for the sector as all telcos would remain focused towards free cash flow improvement,” Bank of America securities research analyst Sachin Salgaonkar said in a note.