DoT's Rs 3,050-crore penalty order drags down Airtel, Vodafone stocks

Underperformance may continue on price hike delay, launch of JioPhone

Stocks of telecom service providers Bharti Airtel (Airtel) and Vodafone Idea (VI) were down by 2.2 and 4.2 per cent respectively on Friday. The stocks were reacting to notices by the Department of Telecommunications (DoT) to the companies asking them to pay Rs 3,050 crore in cumulative penalties within three weeks.

The DoT order follows a recommendation made five years ago by the Telecom Regulatory Authority of India imposing a penalty of Rs 3,050 crore on Vodafone, Idea and Airtel for allegedly denying inter-connectivity to Reliance Jio. While an Airtel spokesperson indicated that the company would challenge the demand and pursue legal options, the issue will remain an overhang in the near term.

The other factor weighing on the Airtel stock has been a downgrade by UBS Securities on Thursday. Say analysts led by Navin Killa of the firm, “While the company is in as strong a position it has ever been, especially with a solid spectrum and capital positioning, we also believe the scenario of a substantial and immediate subscriber inflow from a potential VIL closure has been eliminated for now.”

The other factor which has been weighing on the stocks and remains the key trigger for sector, is the lack of price hikes and thus an increase in average revenue per user or ARPU. Given the impending launch of the JioPhone Next, aimed at upgrading customers from 2G/3G to 4G, there could be a near term pressure on pricing. “While we believe the current pricing is unsustainable for the sector, we do not rule out near-term increase in competitive intensity given Jio's focus on market share gains,” say Varun Ahuja and Viral Shah of Credit Suisse in a note earlier this week.

Analysts believe that gradual hikes could take place with improvement in macros as well as consumer sentiment in the upcoming festival season. However, for the street to react positively to any pricing actions, BofA Securities believes that the quantum of hike has to be upwards of 25 per cent.

What had hit sentiment and led to some correction in telecom stocks earlier in the week was Jio’s decision on 20 per cent cashback on Rs 249/55/599 packages. However, the move is unlikely to impact ARPUs of Jio or competitors as the cashback is to be used on retail platforms, is limited to three packs and was aimed at cross-selling among RIL’s businesses.

Despite the near term challenges, the street continues to bet on Bharti Airtel. Credit Suisse believes the company will be a beneficiary of an eventual improvement in pricing over the medium term as well as of the improving regulatory environment along with organic market share gain.

Twenty-seven of the 29 analysts tracking Airtel have a buy recommendation while 16 of the 21 analysts covering VI have a sell rating. Given the limited upside from the current levels, investors should await further correction in Airtel stock before considering it for their portfolios.