Telecos to benefit from likely tariff hikes, says IIFL Securities; upgrades Vodafone Idea, ups target on Bharti Airtel

India’s telecom companies, Vodafone Idea, Bharti Airtel and Reliance Jio are likely to benefit from expected tariff hikes in the next three years and chances of a reduction in Adjusted Gross Revenue (AGR) liability, analysts at IIFL Securities said.

The debt-laden Vodafone Idea has launched its Follow-on Public Offer (FPO) to raise ₹18,000 crore from the primary market, which it intends to use for capacity expansion and payments of debt and other dues.

Analysts believe Vodafone Idea FPO will also benefit Indus Towers from the telco’s improved financial position and subsequent roll-outs, as well as potential reinstatement of dividend.

Also Read: Vodafone Idea FPO opens today: Shares rise; GMP, price, other details. Should you apply?

IIFL Securities upgraded its rating on Vodafone Idea shares to ‘Add’ with a target price of ₹14 per share, and recommended subscribing to the Vodafone Idea FPO. The broking firm also upgraded Indus Towers to ‘Buy’ with a target price of ₹379 per share.

It believes the equity infusion in Vodafone Idea, which is likely to be followed by debt raising, will result in a ₹45,000-crore funding, and should enable the telco to narrow the 4G coverage or capacity gap with peers. This would not only arrest sub losses, but also enable faster upgrade of 2G users to 4G. 

Direct tariff hikes, coupled with this upgrade, is estimated to drive Vodafone Idea’s Average Revenue Per User (ARPU) from ₹145 in Q3FY24 to ₹241 in FY27. 

Also Read: Vodafone Idea FPO: Shares jump 4% after rise in GMP. Should you apply?

IIFL Securities also saw a decent chance of a favourable verdict in the AGR curative petition, and it assumes 50% liability relief on ₹70,000 crore AGR dues.

IIFL Securities also believes tariff hikes are imminent post-elections, driven by the need for improvement in return ratios. Reliance Industries is likely to consider an initial public offering (IPO) of Jio Platforms. 

“With the government keen on ensuring a three-player market, we do not see the regulator frowning upon tariff hikes. Notwithstanding the weak spending environment in low-income and rural segments, we expect down-trading to be limited considering the staple nature of telecom,” IIFL Securities said in a report.

Also Read: Q4 Results Preview | Telecom cos to report moderate growth on ARPU upgrades; Bharti Airtel, Jio to lead the pack

Bharti Airtel and Reliance JIO are also expected to benefit from higher-than-expected tariff hikes. Bharti Airtel may also gain from a reduction in AGR dues.

“While we were already building a 20% tariff increase in 2HFY25, we now build in another round of 15% tariff increase in FY27. We also assume ~150 bps lower steady-state RMS for JIO and Bharti Airtel versus earlier, considering a more competitive Vodafone Idea. If we assume similar AGR relief as Vi, Bharti’s ₹36,000 crore liability could halve,” IIFL Securities said.

Based on the above factors, the brokerage raised Bharti Airtel share price target to ₹1,379 per share from ₹1,215 earlier and JIO’s Enterprise Value to $104 billion from $96 billion.

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