BofA upgrades Voda Idea stk; telcos may up tariff by 20-25% post LS polls

The Indian telecom sector could see a hike in tariffs to the tune of 20 – 25 per cent versus the earlier expectation of 10 – 15 per cent post the Lok Sabha election outcome on June 4, suggests a note from BofA Securities.

Improving cash flows on the back of these tariff hikes, BofA Securities said, could be utilised by the Indian telecom companies to grow high margin broadband, enterprise / data offerings.

Once this hike in tariff of 20 – 25 per cent by telecom companies, BofA said, is absorbed by the consumers, the Indian telecom companies are likely to resort to another round of hike in the next 12 months as telecom companies look to monetise their 5G investments.
 

While no telecom company in India is keen to disrupt the market dynamics yet, visibility on potential initial public offer (IPO) of Reliance Industries Limited's (RIL’s) telcom business – Reliance Jio – as stated by the RIL management in the past is a key sector event to watch-out for going ahead, the brokerage said.

“Bullishness on higher tariff hike is driven by our view of willingness of all telecom companies to participate in tariff hike (last hike: Nov’21); consumers’ ability to absorb 20-25 per cent hike given lack of alternatives / improving stickiness of data offering; continued government support; and likely investments in data centers etc. to tap the AI-led upside. Tariff hikes could be after general elections results on June 4 – likely in the next few weeks to months,” wrote Sachin Salgaonkar, Pankaj Mehendiratta and Shalav Saket of BofA Securities in the recent note.

At the bourses, meanwhile, stocks of leading telecom players have seen a good run.

While Vodafone Idea logged 92 per cent gain in the last one year on the BSE, Sunil Mittal-owned Bharti Airtel stock jumped 65 per cent, shows ACE Equity data.

Indus Towers (up 125 per cent), MTNL (93 per cent), Tata Communications (38 per cent) and Tata Teleservices (Maharashtra) moved up 32 per cent respectively during this period, data shows.

Vodafone Idea stock upgraded

Among the lot, BofA Securities believes Vodafone Idea offers highest leverage for tariff hike as a pure telecom play with 5 per cent average revenue per user (ARPU) increase leading to around 12 per cent increase in the earnings per share (EPS). SEE THE DETAILED STOCK RECOS HERE

However, the Vodafone Idea stock is not a 'buy' yet as BofA awaits further clarity on funding position improvement post fiscal 2025- 26 (FY26) as the spectrum moratorium ends.

“Our FY25/26 EPS moves to Rs (2.7) / (1.5) as we factor recent capital raise. We reduce our weighted average cost of capital (WACC) to 10.1 per cent from 10.6 per cent. Our price target increases to Rs 14.5 from Rs 9.4 earlier," BofA Securities note said.

BofA Securities has also raised the 2025 and 2026 EPS estimate for Bharti Airtel by 5-6 per cent, but RIL's EPS reduces by 2-3 per cent due to higher depreciation and amortization.

“We think Bharti / RIL would likely use improving cash-flows to invest/grow their fiber broadband, enterprise, data-center and digital biz. Most of these are high margin sticky businesses, helping these companies diversify cash-flows from cellular business and add new growth drivers. Indus towers is our preferred pick in the telecom sector,” analysts at BofA Securities said.