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A tariff hike round the corner?

There has been a huge buzz that the telcos will go in for the much-needed tariff hike once the elections are over, and the new government is in place. Now that, Narendra Modi has been sworn in as PM for the third straight term, all eyes are on the telcos, Bharti Airtel, RJio and Vi.

A tariff hike is long since overdue. The industry spent Rs 1,500 billion during the 5G auction in 2022, with Reliance Jio, Bharti Airtel and Vodafone Idea accounting for Rs 800.8 billion, Rs 430.4 billion and Rs 188.0 billion, respectively. Further, the telcos have spent nearly Rs 3,000 billion since 2014 to acquire spectrum across various bands. The telecom sector has low average asset turnover ratio of 0.3 times (fiscals 2020-23), indicating high CapEx requirements on a sustained basis. CapEx intensity is high and estimated at ~30% of total revenue in fiscal 2023 and ~25% in fiscals 2024 and 2025. Even network OpEx was 25-30% of revenue based on data collated for industry players over fiscals 2021-23.

Sachin Salgaonkar, Senior Research Analyst, BofA Securities said he expects to see a 15-20% tariff hike by telecom companies because, for the last two to two and a half years, the sector did not see any tariff hike. We are at a point where the market is generally okay from a consumption point of view to take that tariff hike.”

“We expect the industry to take a 15-17 percent tariff hike post the elections. The last hike of about 20 percent was in December 2021. Bharti’s current ARPU of Rs 208 is set to go up to Rs 286 by the end of FY27. This will be driven by a tariff hike contributing Rs 55, upgradation of 2G customers to 4G contributing Rs 10, and customer upgradation to a higher data plan (both 4G and 5G) and moving to postpaid delivering Rs 14 gain,” a report by Antique Stock Broking said.

Reliance Jio would require two tariff hikes in the range of 15-20% over the next three years to close the gap with Bharti Airtel on the average revenue per user (ARPU)-level, according to analysts. Jio’s ARPU is expected to touch Rs 235 by FY27 on the back of tariff hikes and improving subscriber mix. The company’s ROCE may improve as it monetizes the fresh spectrum investments over the next 1-2 years.

“Given that 5G is being offered for free, ARPUs have limited room to expand without tariff hikes. We raise our ARPU estimates by 1-2% and expect ARPUs to rise at 9% CAGR (compound annual growth rate) over FY24-27 to Rs 235 by FY27,” said analysts at Jefferies.

“While accrual CapEx should come off going forward, we expect cash CapEx to stay elevated in FY25 as CapEx creditors unwind further,” said IIFL Securities in a note.

According to Axis Capital, a hike of 25% by operators is expected. “For telecom operators, the projected roughly 25% hike in headline rates is expected to correspond to a 16% growth in the average revenue per user (ARPU),” said the brokerage.

Peeyush Vaish, TMT industry leader at Deloitte, South Asia, anticipates a 10-15% increase in ARPUs, adding approximately Rs 100 per subscriber by the end of this calendar year. This hike is expected to be driven by price increases for 4G/5G bundled packs and the phasing out of low-value packs.

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