Vodafone Idea and Airtel need tariff hikes, AGR moratorium might not be enough, say analysts

• Analysts say that the government will have to do more if it wants to help sustain Vodafone Idea in the mid-to-long term.
  
• For Vodafone Idea to survive, a substantial hike in tariffs is necessary.
  
• The four-year AGR dues moratorium has eased the liquidity crunch in the sector, but the government will have to set floor tariffs for a tariff revival in the sector.
  

Vodafone Idea and Airtel may need to go for a hike in tariffs for the Indian telecom sector to make a strong comeback. While the telecom relief package has addressed the liquidity crunch in the sector, the immediate need for the telecom providers is a tariff hike, said analysts.

To recall, the three telcos – Airtel, Vodafone Idea and Reliance Jio – welcomed the telecom relief package, stating that it will help the telecom sector de-stress and unshackle.

At the outset, the package benefits Airtel and Vodafone Idea the most. It’s especially critical for the latter, which is fighting for its survival and running on fumes, with a cash balance of just ₹920 crore at the end of the June quarter and debt worth ₹1.9 lakh crore.

But the average revenue per user (ARPU) -- a measure of how much each user contributes to the telecom company every month -- remains on the lower side. Analysts say tariff hikes are necessary, and they are especially critical for Vodafone Idea.

Airtel is the market leader both in terms of active users, as well as the ARPU, meaning it’s in a better position that every other telco in the country – even Reliance Jio – when it comes to monthly revenues.

Vodafone Idea’s low ARPU, combined with the loss of lakhs of subscribers every month, could prove fatal for the telco.

Here’s where analysts want the government to step in.

“The above reforms only address the liquidity stress in the sector and does not solve the elevated leverage levels in the sector. Sustainability of the sector is still predicated on tariff revivals -- we believe that [the] government needs to implement more structural reforms,” stated a report by JM Financial dated September 15.

The report further states that this can be done by the government in two ways:

1. Introducing floor tariffs across the sector.
   
2. Setting up a mechanism for sustainable tariff hikes in the future.
   

The second option could result in a continued increase in prices for telecom subscribers, which may not get support from the government.

A JP Morgan report dated September 16 states that while these telecom reforms address near-term liquidity challenges for Vodafone Idea, they won’t be enough to improve the telco’s situation in terms of capex (capital expenditure) to improve network quality. This, the report states, will require either a capital raise, or a substantial tariff hike.

Nitin Soni, senior director at Fitch Ratings, said that the relief package will provide cash flow relief to the telecom sector thanks to the moratorium, but he was not optimistic about Vodafone Idea’s prospects.

“Specifically on Vodafone idea, it is unlikely to salvage the company’s competitive position given its subscriber losses, declining average revenue per user (ARPU) and insufficient cash generation to fund interest cost,” he told Business Insider.

SEE ALSO:

Airtel, Vodafone Idea and Jio welcome telecom relief package, but analysts are divided on whether it is enough

Indian government dials M for moratorium – Airtel, Vodafone Idea get a four-year relief on AGR dues

Government picking up a stake in Vodafone Idea ‘might be a remedy worse than the disease’, say experts