NEW DELHI : Following in the footsteps of Vodafone Idea and Bharti Airtel, which will hike the mobile tariffs on 1 December, Reliance Jio too on Tuesday said it would hike tariffs in ‘next few weeks’. While this could mark the long-awaited beginning of price recovery for telecom companies, the extent of gains could be decided by the quantum of hike and government relief.
Is the hike sustainable?
According to equity research analysts at Jefferies Financial Group, “The tariff hikes are positive, in our view, and come five months ahead of our expectation. However, the move does not materially change our price targets, unless the hike is significantly above 20%. Our estimates currently factor in a 20% hike in early FY21."
Besides tariff hike, government relief for the ailing telecom sector is also important. The sector has been reeling under stress due to intense competition, adverse regulatory and judicial orders.
The last nail in the coffin of the beleaguered industry was the 24 October SC judgement that imposed a penalty of at least Rs92,000 crore on the operators, many of whom have also since folded up. The verdict upheld the government’s definition of adjusted gross revenue (AGR) which included revenue from non-core telecom operations such as rent, dividend and interest income, marking the end of a 14-year-long legal battle.
A committee of secretaries under the cabinet secretary is considering demand of telecom companies for relief and will suggest ways to alleviate their financial stress and create a favourable investment climate.
“Despite the tariff hike, we think relief from the government on AGR dues and other measures remain important for the incumbents, especially for Vodafone Idea. We expect the government to put a moratorium on AGR and spectrum dues for the next two years, aiding cash flows. A reduction in license fee and an extension of Interconnection Usage Charges (IUC) is also likely," Jefferies added.
Should you buy?
The telecom stocks have rallied sharply in the last few days, and analysts expect the positive momentum to continue in the near-term. Vodafone Idea stock has more than doubled this month to ₹7.07 from its 30-day low of ₹2.61.
Goldman Sachs recommends ‘buy’ for shares of Bharti Airtel with a target price of ₹415. Bharti Airtel has surged over 34% to ₹437.25 from its 30-day low of 325.60 in the last month.
“Despite recent outperformance, we reiterate our buy rating on Bharti, as we believe a sustained tariff hike, market share gains and government relief will help business momentum. Given sector stress and government focus, we expect the tariff hike to be sustained for the next few months. We consider Vodafone Idea to be the biggest beneficiary, but overhang from the AGR case still puts a question on long-term recovery," say analysts at Bank of America Merrill Lynch.
Mogran Stanley has raised the price target for Bharti Airtel to ₹410 from ₹360 per share.
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