Tariff hikes next on agenda for telcos after auctions

Bharti Airtel, Vodafone Idea and Reliance Jio bought spectrum worth ₹11,340 crore in the just-concluded spectrum sale, which will be paid to the government in 20 annual instalments. The first instalment is likely to be in the range of ₹500-570 crore for all three carriers combined.

The selective and strategic purchases indicate a focus on monetizing existing investments into spectrum before spending on additional capex. “This bodes well for tariff hikes. We expect a 20% tariff hike in 2QFY25 and another 10% hike in FY27," said Jefferies in a note.

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“With the conclusion of the auctions without any surprises, the ability to take tariff actions should resume. We have baked in tariff hikes of 25% spread over 2Q/3QFY25," said analysts at JPMorgan, noting that ability to raise headline tariffs soon after auctions led to sharp stock reactions. Airtel and Vodafone Idea stocks saw a spike in trading on Tuesday.

“In our view, tariff hike is the next potential catalyst for the stocks, and we'll keep an eye out for any updates on this front," Swiss brokerage UBS said in a note.

Analysts at Citi Research said that telecom stocks of Bharti Airtel and Indus Towers expected to see upsides following the auctions, owing to tariff hikes and deployment of networks that will use the spectrum that they get in the auctions. 

Also read | Govt nets ₹11,340 crore from spectrum auctions, third lowest since 2010

“The next six months could be marked by several event catalysts: 1) Tariff hikes; 2) Potential 5G monetisation; 3) Granularity on VI’s capex and tower addition plans; 4) Indus’s dividend resumption + possible corporate action; and 5) Progress on the AGR case," it said in a note on the spectrum auctions. 

5G monetisation refers to telcos charging customers for 5G services separately from 4G or charging them a premium for using 5G. Vodafone Idea's capex plans refers to its network expansion beginning from the ongoing quarter after it raised ₹18,000 crore through follow-on public offer (FPO) and is in the process of raising ₹25,000-35,000 crore from banks. On Wednesday, the third largest carrier said it had tied up with Samsung for 4G and 5G virtual radio active network equipment for Chennai, Karnataka and Bihar circles, that has also helped it to achieve minimum rollout obligations as mandated by the government. Indus' corporate action refers to stake sale in the country's largest tower provider by promoters. Vodafone group Plc recently sold 18% stake for ₹15,300 crore. Telcos' plea on correcting estimates in the adjusted gross revenue (AGR) case are still pending in the Supreme Court.

They added that the muted participation in spectrum auctions indicated that the phase of peak competitive intensity had ended. 

Tariff Hikes

Analysts at Macquarie noted that after the spectrum auctions, telcos’ focus will shift to an industry-wide tariff hike. “For Bharti Airtel we assume a 20% Arpu increase in the upcoming September quarter and a 20% increase in FY26, this would translate to a near 10% uplift in India Ebitda in FY26 (our estimates) and potentially improve fair value to ₹1,410- ₹1,660 per share," they said. The 20% increase in Arpu, or average revenue per user, would translate to ₹245-295 per month from ₹209 in the quarter ended 31 March.

With telcos having spent over ₹1.5 trillion on 5G airwaves in 2022 and another ₹11,340 crore in the latest auctions, the entire focus will move towards monetisation of the investments made till date. This would mean higher tariffs for consumers, which may be higher by a fourth of their existing expenditure on mobile phone and data services.

IIFL Securities noted that if all telcos opt for the most relaxed payment option which is 20 equal annual instalments, the annual payout works to about 10% of total bid value at 8.65% interest rate. This translates into ₹100 crore for Jio, ₹700 crore for Airtel and ₹350 crore for Vodafone Idea, which it said would be 'quite manageable.'

Bharti Airtel, India’s second largest carrier by subscribers, acquired 97MHz spectrum in 900 MHz, 1800MHz and 2100MHz frequency bands, renewing the spectrum that was expiring in 2024 and buying additional spectrum to bolster its mid band holding across key circles. Its subsidiary Bharti Hexacom acquired 15MHz for ₹1,001 crore, part of the total spectrum bought.

Also read | Airtel likely to spend the most at spectrum auctions, govt may get up to $2 bn

Vodafone Idea bought airwaves in 900 MHz spectrum in UP West and West Bengal circles, and added to its holding in seven circles of Andhra Pradesh, Tamil Nadu, Karnataka, Punjab, Rajasthan, UP East and Kolkata, aimed at enhancing experience of its 4G customers. The company has also acquired 1800MHz spectrum in Madhya Pradesh and 2500MHz spectrum in Bihar, which will help in increasing the network capacity quickly.

India’s largest telco Reliance Jio acquired the least amount of spectrum 1.4MHz of additional spectrum in the 1800MHz band in Bihar and West Bengal.