Telecom - Outlook CY21: A year of industry repair? - ICICI Securities

CY21 could be a year of significant industry repair with another round of large tariff hikes, which may drive higher revenue growth than previously (as major SIM consolidation is done) and with higher incremental EBITDA margin. Also, lower capex intensity means strong FCFE generation, particularly for Bharti Airtel (Bharti). For Vodafone Idea (VIL), it could be decisive year with big events such as fund raising, translation of tariff hikes, and reducing cash losses. We expect Bharti to continue growing its revenue market share contrary to consensus estimates. Spectrum auction may not be critical for incumbents due to their already strong holdings. Clarity on contingent liabilities would be closely watched on AGR payment terms and outcome of the one-time spectrum charges case.

- Tariff hikes should come anytime. Telcos took tariff hikes of 25-40% in the prepaid category during Dec'19. Another round of hikes was expected in CY20, but has been pushed to CY21 due to: 1) Covid shock; 2) pending clarity on floor prices; and 3) VIL completing network integration and new branding. TRAI has floated a consultation paper evaluating floor prices (report) on telecom services, and operators have asked for 5-9x increase in data prices. Outcome of the consultation is awaited. VIL has said it would be the first to take tariff hikes and is probably waiting for clarity on floor prices. Regardless of floor prices, tariff hikes to come latest by Mar'21 and peers to follow. We estimate tariff hikes to drive ~20% rise in Bharti / VIL's ARPU for FY22E.

- 4G subs addition should continue. 4G penetration has increased to 57%, up 425bps in 6MCY20 despite the Covid shock. 4G subs base has grown by 7% to 646mn (43mn net add). This was partially enabled by Jiophone sales, which grew to 100mn in Mar'20. CY21 should see continued growth in 4G subs addition and may also accelerate from operators (subsidising) driven the low-end smartphone launch. This should help increase ARPU organically from change in subscriber mix. Unlikely earlier, Bharti has seen strong growth in its 4G subs in CY20 and, considering it has been expanding its 4G network deeper into the market, it should continue to grow fast. VIL's 4G net add has been subdued.

- Revenue (comparable) growth to be higher. Industry AGR (incl NLD) revenues have grown 27% over Q2FY20 to Q2FY21 aided by tariff hikes; however, industry revenues are still 8% lower than in Q1FY17. Further, operators' investment has significantly risen due to investments in 4G, AGR liability and higher debt. The industry therefore needs significantly higher revenues compared to pre-RJio launch to earn respectable return ratios. Our working shows, VIL needs >50% tariff hikes to cash breakeven in FY23E and remain a going concern. We are factoring-in mobile revenue growth (adjusted for IUC impact) of 26% and 20% for Bharti India mobile and VIL respectively in FY22E.

- Bharti's incremental revenue market share to remain higher. Bharti's incremental AGR (incl NLD) has grown sharply narrowing its gap with the market leader, thereby driving higher market share. Bharti's AGR (incl NLD) market share improved by 100bps YoY to 32.2% during Q2FY21 despite negative impact of Bharti becoming a net IUC payer from receiver. This should correct with IUC becoming nil from 1st Jan'21. This compares to RJio grabbing 315bps market share to 39%, which benefited from becoming a net IUC receiver unlike payer earlier. Bharti's incremental AGR (incl NLD) YoY has grown from just Rs3bn in Q2FY20 to Rs31bn in Q2FY21 and it has narrowed its gap with RJio to Rs13bn from Rs30bn earlier, thus earning higher incremental market share. This gives us confidence that Bharti's market share would continue to grow in FY22E too.

Further, Bharti was able to pass-on tariff hikes efficiently with least leakage into ARPU among telcos. Company may again be a net beneficiary of SIM consolidation (though lower magnitude) from upcoming tariff hikes, which is not factored in our estimates.

- Capex to moderate, FCF generation to rise. On normalised basis, telcos should earn 65-70% incremental EBITDA margin and Bharti should get most of it. VIL may see higher EBITDA from cost optimisation and targeted saving of Rs40bn. We expect capex to moderate for Bharti in FY22E on completion of significant 4G expansion and investment into fiber. Though VIL has under-invested in network, we see a cashflow mismatch which would cap its ability to incur capex. Bharti has already been generating FCF and a rise in it EBITDA would only add to cashflow. We see Bharti generating Rs150bn in FCFE while VIL would see huge cash burn of Rs80bn. The cashflow is positive because it was positively impacted by moratorium on deferred spectrum liability.

- Spectrum auction limited to renewal spectrum. DoT is planning for a spectrum auction in Q4FY21 (Jan-Mar'21) for spectrum coming up for renewal, and unsold 4G spectrum. It is unlikely to auction the 3300-3600MHz spectrum, which is the popular 5G band. Bharti and VIL have very limited spectrum coming up for renewal and RJio has 850MHz (originally owned by Reliance Communications). 1) Bharti has Rs129bn of spectrum coming for renewal at TRAI's recommended spectrum reserve prices if it renews entire spectrum. However, the company has already bought spectrum from Tata Tele, Telenor and Videocon in these circles, and thus does not need to renew its entire spectrum. In our base case, we estimate Bharti to buy spectrum worth only Rs58bn in the upcoming auctions. 2) VIL has Rs100bn worth of spectrum coming up for renewal; however, the Vodafone and Idea merger has added significant spectrum in VIL, and it may require to buy spectrum worth only Rs19bn in the upcoming auctions.

- Liabilities to watch. 1) AGR order says telcos have to pay 10% of total AGR dues by end-Mar'21. Operators believe they have already paid more than 10% towards AGR dues and don't see more payment in Mar'21. DoT is consulting with the Solicitor General on AGR order interpretation; and 2) the Supreme Court is hearing the one-time spectrum charges case. Bharti has already provisioned Rs56bn and VIL Rs39bn in Q4FY20. In case telcos lose the case, it could be the worst case impact in our view.

Source : Equity Bulls

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