India's Telecom Sector Resilient Amid Rate Hikes, Inflation: Bernstein

India's telecom industry has been resilient in the face of rising rates and inflation even as other sectors have seen adverse effects, according to Bernstein.

Telecom companies' outperformance is driven by "improving outlook and reasonable valuations", the research firm said in a report. And structural drivers including growth in average revenue per user led by tariff hikes, increasing data consumption and government reforms remain intact, it said.

The industry across sectors faces pressure of rising commodity costs as Russia's invasion of Ukraine has amplified supply-chain disruptions and roiled global energy markets. India's telecom sector is, however, emerging from a bruising pricing war that drove losses that almost drove Vodafone Idea Ltd. to bankruptcy before it chose to avail a government bailout.

Bernstein said the focus for the telecom sector is now on upcoming 5G auctions and the likelihood of another round of tariff hikes.

"We believe 5G auctions could be less likely to be an overhang with TRAI suggesting ~40-50% reduction in reserve price," the report said. The wireless carriers can plan their spectrum outlay without any upfront component, it said.

Bharti's Airtel Ltd.'s capex in the fourth-quarter was less than expected at Rs 4,200 crore (19% of revenues), improving free cash flow and suggesting 5G-led capex increase is a few quarters away, the report said.

Tariff hikes are likely in second half of 2022, led by Bharti Airtel, helping the operator achieve its medium-term ARPU target of Rs 200. The operator also led in the fourth quarter ended March.

Bernstein revised the target price of Bharti to Rs 900 from Rs 915 against Wednesday's closing price of Rs 695.20. The report keeps subscriber estimates unchanged and updates ARPU slightly.

The research firm expects Bharti ARPU to grow at an annualised rate of 12% over FY23-25, led by tariff hikes and higher 4G adoption among subscriber base. It picked Bharti Airtel as its top pick in India's telecom sector.

Key Highlights

• In Q4, SIM consolidation led to a higher churn but has moderated after tariff hikes.

• Bharti gained revenue and subscriber market share at the cost of Vodafone Idea in Q4.

• Bharti Airtel's ARPU rose 9.4% sequentially to Rs 178 in the fourth quarter, while Reliance Jio Infocomm Ltd.'s 10.6% jump to Rs 168. Vodafone Idea reported an ARPU of Rs 124, up 7.8%.

• Mobile revenue growth was led by Bharti at 9.5% sequentially, ahead of Jio (8%) & Vi (5.8%).

• Bharti Airtel gained most revenue market share, which as expanded to 36%, at the cost of VI (21%). Jio's market share remained stable at 43%.

• The sector grew 6-10% quarter-on-quarter, driven by tariff hikes.

• Revenue growth for Bharti at 9% was ahead of Jio's 8%.

• Bharti Airtel reported the highest operating margin at 51%, followed by Jio (49%) and Vodafone (45%).

• Jio had a higher subscriber churn (about 85 lakh versus 0.5 lakh) and lower revenue growth.

• Jio performed better in terms of broadband subscribers addition, with its subscribers at 53 lakh against Bharti Airtel's 45 lakh.