India's telecom sector has been buzzing lately thanks to the spectrum auction and tariff hikes. Both the developments have come as a breather to investors in telecom stocks.
The auctions were expectedly uneventful and saw limited bidding war. Only 1.3% of the total spectrum on offer was sold, a result of a cautious strategy adopted by telecom companies as their investment in the 5G spectrum is yet to reap good rewards.
Limited additional investments in the recent auctions, along with the recent tariff hikes companies have taken is expected to improve their cash position.
Note that only 140 MHz of spectrum was sold this year as against the sale of over 50,000 MHz in the 2022 auction. As such, operators have built significant spectrum holding for 5G in the last auction ahead of the launch. But 5G utilization is still very low.
“The huge 5G investments done by Bharti Airtel Ltd and Reliance Jio face challenges with regard to monetization due to lack of use cases,” Centrum Broking said in a report dated 30 June.
The limited demand for spectrummeant most of it was sold close to the base price, saving telcos from additional financial liabilities. The 900 MHz band, where a significant amount of spectrum was put up for renewal, also saw limited out-bidding.
While the bidding was not expected to be aggressive, telcos had prepared themselves for this possibility by submitting a substantial amount of earnest money deposit, which determines the limit up to which telecom companies can bid.
The total deposit submitted by telecom companies for this year's auction was ₹4,350 crore, which entitled them to bid up to ₹52,000 crore. Against this, the total final purchase was only ₹11,340 crore.
To be sure, telcos would not be needing much investment in spectrum, going ahead. ICICI Securities expects very little spectrum investment for telcos till financial year 2029-30 as renewals are minimal and operators have significantly strengthened their holdings in the past across coverage and capacity spectrum.
In this backdrop, Reliance Jio’s capital expenditure is expected to moderate ahead with peak 5G rollouts behind. Analysts from HSBC Global Research project Airtel’s capex intensity (capex as a percent of revenue) to drop to 23% in FY26 from 30% in FY24 owing to lower 5G coverage capex and rural expansion.
Further, after November 2021, telcos finally increased tariff last week. This would improve the average revenue per user (Arpu) of telecom companies and boost profitability.
According to Motilal Oswal Financial Services, the tariff hikes could aid Vodafone Idea Ltd in increasing the Ebitda CAGR to 17% for FY24-26 versus barely 4% over FY20-24. The brokerage forecasts Ebitda CAGR of 26% and 16% for Jio and Airtel over FY24-26, respectively.
The new tariff structure would reduce the gap in the entry-level plans between Jio andAirtel/Vodafone to 5% from 15% before the price hikes. This wouldpotentially lower the churn of subscribers for the segment with a sizeable subscribers share of 25% for Airtel and 40% for Vodafone.
The recent capital raise by Vodafone Idea should also help it improve network coverage and lower the pace of market share loss. Tariffs have also been tweaked to encourage users to shift from 4G to 5G.
Meanwhile, thestock price movement reflects investors’ sentiments in response to the latest developments.
Reliance Industries Ltd’s shares have gained over 7% since it announced tariff hike, while Airtel’s stock has risen about 2%. However, shares of Vodafone Idea, which had rallied after the capital raise in April, are under pressure. For now, investors seem to have factored in the recent events.
In the near-term, the June quarter results may provide further cues for the stocks.
