Telecom service provider Bharti Airtel has started tariff intervention by raising its minimum recharge pack price by 57 percent to ₹155 from ₹99 earlier in two circles, including Haryana and Odisha.
Since the arrival of Jio, the competition in the telecom sector has intensified with the companies attempting to undercut one another by lowering call and data usage rates. However, the telcos have lately been announcing tariff hikes to push ARPU (average revenue per user), a key yardstick to measure the profitability of companies.
“Bharti Airtel has always maintained that the mobile Average Revenue Per User (ARPU) needs to be at ₹200 and ultimately at ₹300, so as to provide a reasonable return on capital that allows for a financially healthy business model,” the telecom company had said in the past while announcing a price hike.
Following the recent tariff hike, analysts have revised up their earnings estimates for Airtel. ICICI Securities, in its equity research report, said, "This is indeed a bold move, and the tariff hike quantum is beyond our best-case scenario."
The development led the brokerage to increase its EV/EBITDA multiple for the company’s India business to 11.5x FY24E from 10.5x and raise its target price to ₹970 per share from an earlier target price of ₹875. It upgraded the rating to "buy" from "add."
"Our earlier one-notch downgrade was in fear of depleting FCF generation on 5G Capex and lower belief in the likelihood of a tariff hike, which has now been addressed," the brokerage said.
The surge in the minimum recharge value has occurred in the customer segment where affordability matters the most. “With the removal of the Rs.99 recharge pack, all of Bharti’s plans now have only unlimited voice offerings (the same as Reliance Jio), which saves customers from multiple recharges when they exhaust their recharge allowance during the validity period,” it added.
Bharti has thus taken a calculated risk, ICICI said, to see how customers respond. This pack is largely being sold to 2G customers only. It does not impact the remunerative 4G customer base. Besides, peers cannot take advantage of the situation to poach its 4G customers.
The brokerage noted that Haryana and Odisha circles together contributed 4.4 percent of Bharti’s AGR in Q1 FY23. Previously, the company did a similar exercise (market testing) when it increased its minimum recharge offer from ₹79 to ₹99 in select circles in CY21.
Additionally, ICICI stated that Airtel will wait for the response from its rivals. If it does not find enough support, then Bharti may be required to restore the ₹99 pack.
Airtel launched its 5G services in eight of top cities in India in October. The company claims to be delivering high speeds between 20 and 30 times with a "super-fast" call connection.
Following a nearly five-fold increase in its consolidated net profit to ₹1,607 crore in the first quarter of the current fiscal, the company maintained this momentum in Q2FY23 by posting a nearly two-fold increase in its consolidated net profit to ₹2,145.2 crore from ₹1,134 crore in the similar quarter of the previous fiscal. Sequentially, the net profit is up by 33 percent.
In Q2 FY23, Airtel's total revenue increased by nearly 22 percent year on year to ₹34,527 crore.
However, the second-quarter net profit fell short of analysts' expectations, though the revenue numbers came in higher than the market estimate.
The average revenue per user, or ARPU, rose to ₹192 in the September quarter from ₹153 in a similar period last year.
The company recorded its second-best-ever EBITDA margin during the quarter at 50.96 percent, an expansion of nearly 221 basis points YoY.
Over the last five months, the stock has witnessed almost one-way rally, rising from around ₹640 levels to the current level of ₹845, delivering a return of nearly 32 percent.
30 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.