All of us increasingly depend on a digital world where a flood of information is available at our fingertips. In multiple surveys, people even rate phone connectivity and the internet as “as important as food, water and shelter”. Telecom players Bharti Airtel, Jio and Vodafone Idea have played a major role in India in building the underlying infrastructure. Now, the Indian telecom sector is preparing itself for a big technology shift. Bharti Airtel and Reliance Jio are readying a rollout of 5G network services in select cities.

In its Q2FY23 earnings call, the CEO of Bharti Airtel Gopal Vittal said, “As the networks start getting built, we will see a significant part of our existing data traffic on 4G move to Airtel 5G+. This will allow us to move more and more spectrum to 5G at the flick of a button.”

We will have to wait and see how prepared these companies are as they start delivering the new 5G service to customers. But analysts from Prabhudas Lilladher, Motilal Oswal and Dolat Capital are upbeat and expect the companies to cash in as 5G rolls out in FY23.

In Q2FY23 Bharti Airtel beat analyst expectations, as it reported a 6.7% QoQ rise in EBITDA to Rs 17,721 crore in Q2. In comparison, Reliance Jio’s EBITDA grew 4% QoQ to Rs 11,489 crore. However, it missed ICICI Securities’ estimate by 4.6%. The brokerages also expect adjusted gross revenue (AGR) dues to decrease and the removal of spectrum charges to boost EBITDA growth for the telecom companies. The average revenue per unit (ARPU) is expected to touch the Rs-200 mark by FY25E, as subscribers for telephone and wireless services rise.

According to data from the Telecom Regulatory Authority of India (TRAI),  the number of telephone subscribers has increased a notch by 0.12% MoM in August 2022. The active subscriber base across India stands at 88% of the total subscriber base. While Reliance Jio and Bharti Airtel logged an increase in active subscriber base in August, Vodafone Idea continued to fall.

The recovery is after the active subscriber base fell in July for all three – Reliance Jio, Bharti Airtel and Vodafone Idea. However, the trend for August has seen a change. Analysts from Prabhudas Lilladher expect Bharti Airtel and Reliance Jio’s subscriber numbers to increase by 20 lakh and 50 lakh respectively in Q2FY23. With August data out, the trend overall seems to be shifting in favour of subscriber growth.

Lower spectrum charges and ARPU to impact revenue growth in Q2

ARPU is key to determine the revenue earned by telecom companies. Given that subscriber numbers are on the rise, ARPU is also likely to improve in Q2FY23 for all the companies, and ICICI Securities suggests that it is likely to grow by 1.5-3% QoQ.

The brokerage also said that Vodafone Idea’s ARPU growth might be the highest in the industry with a 3% QoQ growth to Rs 132. It’ll be interesting to see if this pans out as it has lost a significant amount of subscriber share in the past year. Its subscriber share for Q1FY23 stands at 22.4% against 26.8% in Q1FY21.

Bharti Airtel has however recorded an ARPU growth of 4% QoQ to Rs 190 in Q2FY23, outperforming analysts' expectations. According to the management, growth in ARPU is because of phone upgrades, data monetization and an increase in the use of premium data services. Vittal noted, “Our B2B and Homes business continued their strong growth momentum while Mobile ARPU expanded to Rs 190 on the back of premiumization and customer understanding.” Analysts estimated 1.6% QoQ growth in ARPU for Airtel in Q2FY23E.

Bharti Airtel’s Managing Director Gopal Vittal said the telecom sector increases tariffs to boost ARPU growth. This would also be the primary source of 5G monetisation in the near term, he added as 5G tariffs will be considerably higher than 4G tariffs. Given that the sector has seen nearly a 20% hike in tariff rates since December 2019, ARPU growth will continue to be on the higher side. Reliance Jio’s ARPU for Q2FY23 was reported to be Rs 177, close to the analyst estimate of Rs 178.

Another factor that affects revenue growth for telecom companies is the AGR, a usage and licensing fee paid by operators to the Department of Telecom (DoT). AGR is divided into spectrum usage charges (SUC) and licence fees. SUC ranges between 3-5% and the license fee is 8% of the total revenue earned by telecom companies.

All three telco players have seen a surge in AGR paid to DoT till Q4FY22. Earlier AGR included non-telecom revenue like deposit interest rates and asset sales. However, the new definition excludes them. Reports also suggest that the DoT has completely scrapped SUC charges from July 2022. This would improve the liquidity position for Airtel, Vodafone Idea and Reliance Jio. Bharti Airtel, Vodafone Idea and Reliance Jio’s SUC charges would then reportedly go down by 74%, 81%, and 65% respectively in FY23. However, the full benefit will be seen from H2FY23.

Decrease in AGR has improved EBITDA for these companies, except for Vodafone Idea. It dipped because of high marketing costs in Q1FY23 and a one-time settlement amount paid to Indus Towers. However, analysts from ICICI Direct expect its EBITDA to improve in Q2FY23 on 5G spectrum deployment and reduction in SUC charges and tower-rent charges.

Festivities bring cheer to telecom companies in Q2FY23, Airtel sees debt fall

Bharti Airtel has performed better than street expectations in Q2FY23 with net profit rising 14% QoQ to Rs 3,908.6 crore. Reliance Jio’s Q2 results have also been in line with estimates. However, analysts are sceptical as Jio’s network and selling & distribution (S&D) costs rose 4.7% QoQ and 16.8% QoQ in Q2FY23. S&D costs have been on the rise since Q1FY22 which remains a risk.

Analysts from ICICI Securities maintain an ‘Add’ rating for Bharti Airtel, while Prabhudas Lilladher maintains ‘Buy’. An important reason behind the rating is the improving financials and the trend in debt reduction. Airtel’s net debt/EBITDA ratio was at 2.1 in FY22, which is expected to go down to 0.5 by FY25E. Foreign brokerage Jefferies also maintains a ‘Buy’ rating on the stock as it expects a 27% CAGR growth in mobile EBITDA over FY22-25E.

Trendlyne’s Forecaster predicted Bharti Airtel’s revenue to increase by 3.8% QoQ and net profit by 2.2% in Q2FY23. Although it missed net profit Forecaster estimates by 30% in Q1FY23, it missed estimates by only 8.7% in Q2FY23.

As for Vodafone Idea, the company is not going to report profits in FY23 but falling debt levels would show it is working towards improving its financial position. High AGR dues is a pain point for Vodafone Idea and also a reason for its high debt.

The company, however, has opted for conversion of interest on AGR dues into equity where the Centre will own a 33% stake. Once DoT gives a green signal, Vodafone’s dues should come down by Rs 16,000 crore, according to reports.

Overall, the sector is headed towards growth in all aspects. Subscribers are likely to increase, the rollout of 5G has begun, ARPU is on the rise and consolidation of the sector with Bharti Airtel and Reliance Jio leading the pack would mean better monitoring of the sector by DoT. The only potential risk is an 18-25% higher tariff for 5G services.

In an interview with JP Morgan, Gopal Vittal said, “The industry price repair is unfinished and needed for 5G monetisation and return on capital employed (ROCE) recovery.” Given that telecom is an essential service, Vittal said he is not concerned about consumers rejecting a price hike in an inflationary environment. Hopefully, his confidence is a good sign for the entire industry.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.