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MOSL: TELECOM-Coming out of the woods! Growth likely after 3 years of intense price war

TELECOM: Coming out of the woods

** After a prolonged period of pain, the Indian telecom sector has got a fresh lease of life, thanks to (a) the recent unprecedented tariff hike, and (b) the government's efforts to revive profitability.

** We believe the recent tariff hikes is a beginning of trend reversal with more price hike to come in 2020. The incremental price hike is a function of support for VIL and the needed profitability boost to RJio and Bharti.

** This could be a turning point for the industry, wherein incremental capital commitment would decline with players agreeing on better tariffs.

** In this report, we discuss the recent positive developments in the industry and potential trigger points. We believe that the sector offers strong operating, financial and valuation leverage. While VIL would need more measures for its survival, RJio and Bharti stand to benefit significantly from further relief measures.

Price increase turning a reality
To address the risk of the looming adjusted gross revenue (AGR) liability and to alleviate the financial stress, telcos have announced strong ~25% ARPU increase, which should add INR293b/INR190b to the industry’s overall revenue/EBITDA in FY21E. However, given the second sim card phenomenon, we estimate there could be ~20-30% leakage (partly factored in), which could be more pronounced for weaker players due to the risk of customers retracting back to the primary sim (and thus, reduce their subscriber base). In this case, RJio has the highest share of smartphone devices (estimated at ~79%), and therefore, could see the highest gain. On 2QFY20 annualized basis, Bharti’s consolidated revenue/EBITDA can rise by INR112b/INR81b, while RJio’s revenue/EBITDA should increase by INR133b/INR96b. VIL is likely to see the highest operating leverage given its lowest EBITDA margin and subsequently, its revenue/EBITDA should increase by INR102b/INR74b.