Telecom stocks in focus as Jefferies expects revenue growth to moderate without tariff hike

In Q3 FY23, revenue growth for the top three operators in India moderated to 2 percent QoQ and 18 percent YoY, primarily due to limited uptick in average revenue per user (ARPU), Jefferies said.

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Telecom stocks came in focus after Jefferies released a report on the sector, stating that revenue growth for the industry may continue to moderate without a tariff hike, while market share shifts towards Bharti Airtel and Reliance Jio are expected to stay on.

The research firm noted that high sales and marketing costs could result in margin headwinds for operators in the following quarters, with the escalation in network and S&M costs expected to be a drag on margins.

In the third quarter, revenue growth for the top three operators in India moderated to 2 percent on-quarter and 18 percent on-year, primarily due to limited uptick in average revenue per user (ARPU).

Bharti Airtel led on revenue growth with 2.5 percent QoQ growth compared to a 2.1 percent QoQ revenue growth for Jio and flat revenues for Vodafone Idea. Bharti Airtel gained an estimated 20 bps market share, while Vodafone Idea lost 25 bps market share.

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Jefferies also believes that Bharti Airtel’s 4.4 million net subscriber addition positively surprised, while Jio’s net subscriber addition of 5.3 million and Vodafone Idea’s 6 million subscriber loss disappointed.

According to Jefferies’ report, Bharti Airtel and Jio are both investing heavily in network infrastructure and aggressively rolling out 5G. Bharti Airtel’s India mobile capital expenditure (capex) was the highest in three years at Rs 64 billion, while Vodafone’s capex was limited due to its stretched cash position, resulting in a reduction of broadband sites.

Jefferies believes that the focus on network investments by Bharti Airtel and Jio, combined with Vodafone’s cash-strapped position, will result in market share shifts in favour of Bharti Airtel and Jio. However, the report notes that any significant increase in average revenue per user (ARPU) from current levels will require a tariff hike.

“Capex intensity continues to be high for Bharti and Jio due to aggressive 5G roll-out while is muted for VIL given delay in fund-raise. Although increase in 4G subs base is the catalyst for increasing ARPU, a tariff hike remains the key driver for ARPU improvement amidst limited monetisation opportunities for 5G,” Brokerage firm JM Financial also echoed the sentiment in a telecom review report.

According to Jefferies’, the top three telcos in India, including Bharti Airtel, experienced an expansion of their EBITDA margins during the last quarter, driven by the full quarter of benefits from the spectrum usage charges and operating leverage.

The research firm, however, believes that network costs should increase amid rising network investments, while sales and marketing costs have risen sharply due to elevated churn and 5G promotions.

Meanwhile, JM Financial expects a structural uptrend in industry ARPU driven by the future investment needs. The industry requires an ARPU of Rs 256-285 in the next 3-5 years for a pre-tax RoCE (return on capital employed) of 12-15 percent to justify capex, the brokerage said.

“Bharti is the biggest beneficiary of higher tariffs given the sticky and premium quality of its subs, ensuring that tariff hikes flow through to ARPU. We expect Bharti’s India wireless ARPU to grow at a CAGR of ~10% to INR 285 in FY28 (vs. INR 193 in 3QFY23); hence, we estimate consolidated EBITDA CAGR of ~15% over FY22-28,” JM Financial added while maintaining a buy rating on Bharti Airtel with a price target of Rs 940 per share, an upside of around 20 percent over current market price.

Jefferies has a price target of Rs 850 per share for Bharti Airtel, indicating a 7 percent upside from the current market price. The brokerage firm has assigned an 8.5x EV/EBITDA multiple to Bharti Airtel’s India mobile business. The upside risks include earlier-than-expected tariff hikes and stronger 5G adoption, while the downside risks include delayed tariff hikes, higher-than-expected capex, and slow 5G adoption.

For Indus Towers, Jefferies has a price target of Rs 135 based on a 4x EV/EBITDA multiple, while for Reliance Industries, the brokerage firm has a target of Rs 3,100, indicating a 27 percent upside from the current market price.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

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