ICICI Securities on Sunday said in a report that Vodafone Idea requires more than a 40% tariff hike in the next three years to meet its cash flow needs. The firm said that Vodafone Idea requires a cash flow of Rs 320 billion to service the deferred spectrum equated monthly instalment (EMI) payment, AGR dues, capital expenditure (Capex) and interest on bank borrowings. ICICI Securities said that Vodafone Idea requires its average revenue per user (ARPU) to increase to Rs 79 “to remain a going concern” translating to a 70% increase in APRU.
The firm said that Vodafone Idea will benefit from a rise in 4G users but that it would be “lower than” Bharti Airtel. Further, ICICI Securities said that “a lot of cash burn can be funded from capital infusion” but that Vodafone Idea would still require over 40% hike in tariff in the next three years.
The report released by ICICI Securities highlights that Airtel is the firm’s preferred “high-conviction” stock in the telecom sector, “notwithstanding the rising risk from AGR liability and sooner than expected 5G rollout.”
It has to be noted that the adjusted gross revenue (AGR) case is currently being heard in the Supreme Court with most operators requesting a 15 year timeframe for the payment of dues.
“Ongoing AGR hearing in SC indicates [a] likely rising risk of liabilities from the spectrum traded from Videocon and Aircel,” ICICI Securities said in the report. “Hearing has not concluded and we don’t want to take any view.”
The firm said that Videocon’s AGR liability is 14 billion while Airtel’s liability is Rs 124 billion. ICICI Securities said that the “worst case” liability scenario for Bharti Airtel translating to the total due payable by the company will be Rs 138 billion.
“However, Bharti has traded only 29% of Aircel spectrum and Aircel bought these spectrums only in FY11 (AGR liability is from FY03), hence assigning the entire liability would be unjustifiable,” ICICI Securities said.
The firm said that Airtel in the past few quarters showed “significant resilience” and that it was the only telecom operator to “transfer a sizable part of the tariff hike into ARPU.”
ICICI Securities also reflected on the current stock price of Bharti Airtel which is said to have corrected 12% from its peak levels in May 2020. It was said that the “rising risk of AGR liabilities” played a key part in the price correction of the Airtel stock. The firm said that the current market price of Airtel share price is factoring an ARPU of Rs 165, translating to a 14% increase from the first quarter of the current financial year. ICICI Securities said that Airtel can achieve the ARPU increase “without any tariff hike” by converting its 2G subscribers to 4G. The firm said that conversion of 2G subscribers to 4G would generate 2% to 3% increase in ARPU on a quarter-over-quarter basis.
“Our base case assumption ARPU of Rs187 implies a tariff hike of only 15-20%, which we believe is conservative,” ICICI Securities said.
The firm highlights that the operators recommended five to nine times increase in data prices during the consultations on floor tariff.
5G Not Expected to Become Mainstream Soon
ICICI Securities said that the 5G rollout in India can happen “sooner,” however, the firm doesn’t see 5G “becoming mainstream consumer technology soon.”
The firm said that the 5G ecosystem is evolving and that it is targeted at enterprise use cases. ICICI Securities said that 4G will remain the mainstream consumer technology with 5G being used for “de-clogging network capacity” in places like malls and stadiums.
“Operators don’t have excess spectrum in 4G to refarm to 5G particularly in low and mid bands and consumer 5G cannot be launched solely on 3,500MHz band (very poor propagation capability),” ICICI Securities said in its report.
It was also highlighted that Airtel is already preparing for 5G network integration with its existing network.
“We don’t see total non-spectrum capex rising significantly as 5G network investment would start when 4G rollout is complete,” ICICI Securities said in its report. “Therefore, 5G capex envelope will replace 4G. There would not be significantly higher incremental network capex.”
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