Telecom: Bharti and VIL announce intent to raise tariffs in December | inflection or another false positive? - Kotak

Vodafone-Idea and Bharti Airtel have both issued press releases indicating that they would raise tariffs in the month of December. While Vodafone-Idea's press release indicates a firm date ("will suitably increase prices effective December 1"), Bharti has indicated that it would "appropriately increase prices beginning December".

Vodafone-Idea, we note, has attributed its decision to the acute financial stress in the sector, and called out that mobile data charges in India are by far the cheapest in the world. Bharti's press release, on the other hand, suggests that the Telecom regulator (TRAI) is likely to initiate a consultation for 'bringing rationality in pricing' in the Indian mobile sector that has been operating at 'prices that have been eroding the viability of the sector'.

Our view - Ahead-of-the-event press releases, without specifics, on price increases is a first-of-its-kind development in the sector, if our memory serves us right. The event gains significance in the backdrop of the vocal relief demands from both the companies after the recent adverse Supreme Court judgment on the AGR case. One of the key demands, we note, has been a regulated floor on pricing. Bharti's indication of a potential consultation (on pricing rationality) is interesting in this context. We do note that TRAI's final decision on IUC (move to zero or extension of the 6 paise/min regime) is still awaited. Price increase announcements by Bharti and VIL suggests that the two companies expect an extension, in our view. An extension would mean Jio does not roll back the price increases it took recently. This would mean increased degrees of freedom on pricing for Bharti and VIL, in our view.

Several questions still remain - (a) what would/could be the quantum of price increases?, (b) will this be another false positive on pricing like the two rounds of price increases taken by Jio in 2HCY17 turned out to be?, (c) what could TRAI's recommendations on floor pricing look like? How will the TRAI balance the need for sector repair and universal access? (d) could there be further relief for the sector in the form of reduction in license fee and SUC, moratorium on deferred spectrum liabilities, any waiver in the AGR liabilities, deferred payouts for these liabilities, reduction in GST, etc.?, (e) the big one - has the Government made up its mind to do what it can to ensure that a healthy 3+1-player market equilibrium emerges? We do believe there is enough in it for the Government to at least consider the potential long-term ramifications of further consolidation in the sector and (f) the biggest one - what will Jio do?

A lot of water to still flow under the bridge, in other words. We would still see this as a positive development. We would assume Bharti and VIL have exercised due caution and weighed the risks before announcing their intent to raise prices. There is always the possibility of a misstep; there is a history of missteps!

We shall monitor the developments carefully over the next few weeks. Bharti remains our preferred bet to play the potential market repair (or consolidation), for now.

Source : Equity Bulls

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