Three telecom operators namely Vodafone Idea Ltd (VIL), Bharti Airtel Ltd, and Reliance Jio (RJio) look set to see about 19-21 per cent rise in revenue over the next three quarters, ICICI Securities said in its latest note. Stock performance of telecom companies would closely track the market share trajectory, the domestic brokerage said while citing empirical evidence from the past tariff hike cycles.
During the past two tariff increases, Bharti Airtel performed well on revenue translation and RJio on adjusted gross revenue (AGR) market share. ICICI Securities said revenues in the next three quarters may grow by 20.50 per cent each for Bharti Airtel and RJio. It sees Vodafone Idea's sales to jump 18.7 per cent during the same period. This implies market share for telcos may broadly remain unchanged, the brokerage said.
“The key reasons behind our keen focus on AGR market share: 1) Empirical evidence suggests that a telecom operator that wins market share also outperforms in terms of stock returns. Therefore, the stock return performance trajectory could closely replicate AGR market share,” it said adding that the market share win also represents faster increase in profitability for operator, therefore, warranting higher valuations.
Lastly, a higher AGR market share also implies higher free cash flow (FCF), which helps in strengthening balance sheet. Increase in AGR market share starts the virtuous cycle for a telco, which generally shakes-up during tariff increases.
“In past 10 quarters, Bharti and RJio have been adding almost similar incremental AGR, and this has helped Bharti narrow its AGR market share gap vs RJio,” it said.
In the past two tariff increases, the hike quantum was almost same for each operator, but there was a difference between growth in ARPU and AGR growth for telcos, which implies leakage during revenue translation. The leakage in revenue was due to SIM consolidation, subscriber mix – post-paid category had no tariff hike in the past, and a few subscribers opted for long validity (365 days) recharge, before the new tariff was effective.
Immediately after tariff increase, there was some delay in recharges, hurting ARPU and AGR growth.
“During both tariff increase events, Bharti fared well (in reported revenue basis) compared to RJio and VIL. However, on AGR market share basis, RJio has done well, followed by Bharti. It is difficult to reconcile the difference in performance on reported basis vs AGR. Nonetheless, Bharti’s incremental AGR which was significantly weaker vs RJio has improved or in multiple quarters outperformed RJio. VIL’s AGR market share has dipped during tariff increases,” ICICI Securities said.
During the major tariff increase in December 2019, operators had increased tariffs by 15-40 per cent across prepaid categories. Post-paid tariffs were kept unchanged. The estimated impact on revenue for Bharti/VIL was 21 per cent each; for RJio, it was 35 per cent. In terms of translation to revenue, this was the weakest round of tariff increase due to significant SIM consolidation. Bharti Airtel saw the best translation of tariff increase into revenue, which inferred Bharti benefited from SIM consolidation. The estimated impact of tariff increase was 21 per cent revenue growth, over Q4FY20 to Q3FY21, and Bharti’s revenue grew by 30 per cent. RJio had calculated benefit of tariff increase of 35 per cent in December 2019, but revenue rose 29 per cent over Q4FY20 to Q3FY21. VIL’s revenue dip during the same period by 1 per cent against an estimated revenue growth of 21 per cent.
The second major tariff increase came in November 2021, after a hiatus of two years from first hike. Operators increased tariffs by 20–25 per cent across pre-paid categories. Post-paid tariffs were again kept unchanged. The estimated impact on revenue for Bharti/VIL was 16 per cent each; for RJio, it was higher at 17–18 per cent.
RJio had the highest calculated benefit of 17–18 per cent, but revenue rose 16 per cent over Q4FY22 to Q2FY23. Bharti, the estimated impact of tariff increase was 16 per cent revenue growth, and it delivered revenue growth of 17 per cent over Q4FY22 to Q2FY23. Unlike the decline during first tariff hike, Vodafone Idea’s revenue rose 9 per cent against estimated revenue growth of 16 per cent but the telecom operator was hurt from falling subscriber base.