Airtel, Jio Tariff Hikes: Is the Telecom Sector Ripe for Re-rating? Experts Weigh In

The Indian telecom sector is witnessing a significant shift in pricing dynamics as major players Reliance Jio and Bharti Airtel announce tariff hikes. These changes are expected to boost their average revenue per user (ARPU) and profitability.

Market Reaction to Tariff Hikes

Shares of Reliance Industries and Bharti Airtel reached new all-time highs on Friday, June 28, reflecting investor optimism about the tariff hikes. Industry experts anticipated these increases post-Lok Sabha elections due to the sector’s declining revenue and margins. Capital is required to invest in spectrum and advanced technologies, making these hikes a crucial step.

Expert Opinions on Sector Re-rating

Trivesh D, an analyst at Tradejini, believes the telecom sector is ripe for re-rating due to a unique combination of factors. With just three major players—Bharti Airtel, Reliance Jio, and Vodafone Idea—controlling the market, even minor adjustments in ARPU can significantly impact stock prices.

“Successful spectrum bidding, implementation of tariff hikes, and continued subscriber base growth can all be catalysts for a rerating. As the sector consolidates and becomes more efficient, the market will likely recognize this through a re-rating, potentially leading to higher valuations and better returns for investors,” Trivesh noted.

Details of Tariff Increases

Following the elections and spectrum auctions, telecom companies have raised tariffs by 20-25%. Reliance Jio increased the prices of its monthly and annual plans, prompting Bharti Airtel to hike mobile tariffs by 10-21%. The revised tariffs will take effect from July 3.

Manish Chowdhury, Head of Research at StoxBox, is optimistic about the sector. He believes the migration from 2G to 5G, increased data monetization, and expected tariff hikes will support ARPU growth for telecom providers in the near term.

Sector’s Financial Health and Future Outlook

Prashanth Tapse, Senior VP Research Analyst at Mehta Equities, highlighted that the industry had been awaiting the elections to raise tariffs, which are now increased by nearly 10-25%. This adjustment is crucial for telecom players to sustain rising capital expenditure.

The telecom sector has been a focal point recently, driving digital growth in India and making it the second-largest market globally, with a subscriber base of 1.091 billion as of April 2024. Despite the pressure on high costs due to low ARPU since 2021, the recent tariff hikes could revitalize growth in the sector.

Spectrum Auction and Revenue Projections

India’s spectrum auction, which concluded on June 26, saw the government collecting ₹11,340.78 crore from selling 141.4 units of airwaves, the third-lowest since competitive bidding began in 2010. Despite the muted response, experts remain optimistic about re-rating opportunities in the sector due to the tariff hikes.

Tapse stated, “The industry has planned subsequent hikes every two years, which can boost its revenue growth. We are fundamentally bullish on Bharti Airtel with a target price of ₹1,750 for the next 9-12 months. Vodafone Idea, despite being a high-risk return counter, can also perform with a target of ₹22-24 for the same period.”

Financial Implications of Tariff Hikes

Ankit Jain, Vice President and Sector Head – Corporate Ratings at ICRA Limited, emphasized that the latest tariff hikes will enhance ARPU and could result in additional operating profits of around ₹20,000 crore for the industry once fully absorbed. This profit generation will provide the industry with the means to deleverage and fund capex for technology upgrades and network expansion.

ICRA projects industry revenues to grow by 12-14% in FY25, translating into a healthy expansion in operating profits by 14-16%. This improvement is likely to enhance the industry’s return on capital employed (ROCE) to over 10% for FY2025.

The recent tariff hikes by Reliance Jio and Bharti Airtel mark a pivotal moment for the Indian telecom sector, potentially leading to a sector re-rating. With improved financial health, increased revenue, and strategic investments in technology, the sector is poised for a brighter future, benefiting both companies and investors alike.

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