Sector Update - Telecom - Sep 23, 2020 - ICICI Securities

The rollout of postpaid tariff by the new operator has multiple ramifications for it as well as the incumbents. The plans, while at similar tariff levels of incumbents (except for base tariff that is 20% cheaper than Airtel's offering), largely have the benefits of three major OTT (Netflix basic, Amazon Prime and Hotstar VIP) subscription as the key attraction, apart from family packs and international roaming in higher plans. We see the offering having potential to drive at least some churn from incumbents, unless they match the OTT offers. Matching of the offering, on the other hand, could result in additional annual costs to Airtel and Vodafone Idea (VIL). However, a large chunk (more than two-thirds) of postpaid category in our view, is driven by corporate connections in India (more sticky and mutual terms based). Thus, response of non-corporate segment will be key to churn. The announcement, however, puts VIL in a spot, as it would have to weather churn through cost increase as well as strive to raise tariff for survival.

Valuation & Outlook

The move creates a new layer of tariff based competition in the segment that was so far, unchallenged and lucrative. While both Airtel, VIL, are exposed to this risk of churn, the pressure on VIL will be more. The theme of prepaid tariff hike in near term also remains questionable. We await incumbent's move before incorporating any impact in our financials and valuations. We retain BUY on Airtel with an unchanged target price of Rs. 700/share given comfortable leverage, superior customer quality and consistent KPI. It is our top pick. We maintain SELL on VIL with an unchanged target price of Rs. 6/share, given the difficult path ahead to assure survival.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_Telecom_SectorUpdate_23Sep20.pdf

Source : Equity Bulls

Keywords