Vodafone Idea will continue to face multiple challenges despite price hike

SIM consolidation, inferior network and negative free cash flows even after hike are the key worries for the market

The price hikes announced by telecom operators in their pre-paid plans was higher than what most analysts expected, leading to a sharp rally. Vodafone Idea and Bharti Airtel gained 5-16 per cent in trade while Reliance Industries was up 2.5 per cent. The new plans across segments announced by Bharti Airtel and Vodafone Idea are higher on an average by 30 per cent and come in to effect on December 3. 

This should help increase their blended average revenue per user by Rs 30 and their annual operating profit in the range of Rs 7,000-Rs 9,500 crore each.  Given the sharp increase and the smaller base, Vodafone Idea will see a bigger boost than the other players. 

Analysts at Motilal Oswal Financial Services (MOFSL) believe Vodafone Idea’s operating profit will jump by 3.2 times on an annualised basis with the addition of an incremental Rs 9,220 crore while revenues will grow by 26 per cent. Bharti’s revenue and operating profit on the other hand will rise by 13 per cent and 32 per cent, respectively. 

Prior to the price hike, the annualised FY20 operating profit figures for Bharti Airtel (consolidated) and Vodafone were estimated at Rs 35,000 crore and Rs 4,000 crore. The FY21 operating profit for the two would now be around Rs 45,000 crore and Rs 13,000 crore. The impact of the price hike will be felt gradually especially for the three month plans as they come for renewal with the full effect of the upside getting reflected in FY21. 

Limited downtrading expected

The pricing structure by the two telcos especially the large gap in data has been designed in such a manner that there is little incentive for customers to downtrade to lower priced plans (below Rs 248). Rohit Chordia and Aniket Sethi of Kotak Institutional Equities believe VIL and Bharti have kept a big gap in data offerings of entry-level and ‘popular’ bundled plans to address the issue of potential downtrading. For data customers, downtrading would mean leaving a lot of value on the table while up-trading would offer significant incremental value.

With Jio too indicating that it would raise tariffs by about 40 per cent, there could be some stability as far as pricing is concerned. Analysts however say that the lack of Jio’s pricing details especially the extent of ‘300 per cent higher benefits’ under the revised plans makes it difficult to understand the relative price/value equation. 

Vodafone continues to vulnerable

Despite the price increase, analysts believe that Vodafone Idea would still not be out of the woods. This is on two counts. One is market share loss especially in the eight weaker circles where its spectrum and network capabilities are inferior to Airtel and Reliance Jio. With sharp revenue decline in these circles, MOFSL questions the stability of operating profits post the price increase. Further, given the continued negative free cash flow position, worries still linger despite the ARPU increase. The large capex and interest cost of Rs 18,000 crore will mean its annual free cash flows will still be negative at Rs 8,500 crore in FY21. 

The price hikes could also trigger SIM card consolidation as well as subscriber churn. Analysts led by Naval Seth of Emkay Global believe that the tariff increase and SIM consolidation are positive for Bharti Airtel and Reliance Jio, as Vodafone Idea is still in the network integration phase and might continue to lose higher-than-estimated subscribers and revenue market share.

Analysts at the firm also believe that if the hikes are absorbed and data consumption trends sustain, it will provide confidence of incremental increases as well. In such a scenario, content offering and network quality are key differentiators for subscriber retention as Jio’s pricing gap vis-à-vis incumbents narrows.

Bharti well placed 

Brokerages believe that Bharti Airtel is in a better position and potential fund raising could ease the impending payments including spectrum and adjusted gross revenues (AGR) liability. MOFSL believes that if Bharti plans to repay the AGR liability with a combination of equity (Rs 20,000 crore) and debt (Rs 14,000 crore), the company will need to dilute 8 per cent equity at a pricing which would be 10 per cent higher than the current market price. Free cash flows could be sufficient for the spectrum renewals in FY21 and support deleveraging, they add.