Vodafone Idea's chicken-and-egg situation with tariff hike

Recently, some reports suggested that Vodafone Idea might increase tariffs by 15-20 per cent by the end of this year or early next year. This move, if happens, will be largely on expected lines because ever since the Supreme Court directed the incumbents to pay their Adjusted Gross Revenues (AGR) dues, it has become almost essential for Vodafone Idea to increase tariffs. It's just a question of when and how much.

Even though the telco said that it plans to raise about Rs 25,000 crore within two-three months, it seems that there's no way it can avoid tariff hikes at the moment. But analysts say that it's going to be a catch-22 situation for Vodafone Idea if it goes for tariff hikes soon. Why?

In a note, Kotak Securities has said that the fact that VIL has not seen any revenue uptick despite a round of material price hikes [last December] poses an interesting question. "Does it make sense for Vodafone Idea to push for a price hike till it has fixed its network and is confident of not losing subs as it raised tariffs?" asks analysts at Kotak.

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But Kotak analysts believe that the Vodafone Idea might be looking at price hike irrespective of losing subscribers. "Price hikes remain key to sustainably fixing the network gap challenge as the way to do so is to step up capex and a price hike is the only route to generating higher EBITDA [earnings before interest, taxes, depreciation, and amortisation] to fund such capex," Kotak note said.

Analysts at Bank of America (BoA) Securities that there are a few factors Vodafone Idea could consider before deciding on timing of tariff hike. Firstly, the consumer sentiment and their ability to absorb tariff hike without much downtrading. Downtrading, in simple terms, means customers moving towards lower-value recharge plans. Secondly, Vodafone Idea's improvement in network quality and hence churn going down. "In our view, Vodafone Idea would need to lead the tariff hike given their weak balance sheet," said a report by BoA Securities.

Vodafone Idea has been losing subscribers over the past several quarters. In the second quarter of FY21, it slipped down to third position in terms of wireless subscriber count. In September quarter alone, the telco lost over 8 million subs as compared to rivals Reliance Jio and Bharti Airtel gaining 7 million and 14 million, respectively. The speed at which its ARPUs (average revenue per use) have been rising - 11.2 per cent between September 2019 quarter and September 2020 quarter - is also slower than Jio (13.3 per cent) and Airtel (26.6 per cent).

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Another possible issue with Vodafone Idea's tariff hike is that it should be followed by rivals. While Airtel has said it would follow any price rise immediately, Jio has remained silent on the matter. So any tariff hike would presumably happen if Vodafone Idea believes Jio will follow, expert say.

Analysts at Goldman Sachs said that based on their conversations with investors, the general view is that Jio will not raise prices, and as such Airtel and Vodafone Idea may have to roll back prices if they raise.

"We see limited merit in Jio not raising tariffs if Bharti and Vodafone Idea do. While a tariff increase would help improve Vodafone Idea's cash flows (every Rs 10 is about $400 million of incremental cash flows), we believe that most of this would be deployed towards repaying regulatory and spectrum liabilities ($2.9 billion starting FY23), and thus incremental investment by Vodafone Idea in capex/network would likely be limited," a Goldman Sachs report said.

ALSO READ: Vodafone Idea Q2 results: Loss narrows to Rs 7,218 crore; plans to raise Rs 25,000 crore