A 40-50% hike in prices of Bharti and Idea stocks since the end of August seems a bit much given the large regulatory overhang the telecom industry is burdened with. Bharti Airtel, for instance, needs to pay around R5,000 crore as a one-time charge for the ‘extra’ spectrum it holds. There is then the cost of renewal of licenses at the dramatically higher entry charges as well as the cost of refarming of the 900 MHz spectrum. All told, according to a Kotak Institutional Equities analysis, the negative NPV impact of all of this would have been R138 on a Bharti Airtel share—R83 on each Idea share—in a partial refarming case. Having done the exercise, Kotak analysts assumed telcos would have no option but to hike prices to deal with the higher costs—a 40% tariff hike was assumed over a period of time and this lowered the final regulatory overhang to R15 per Bharti and Idea share. Well, over the past week, Bharti (and Idea to a lesser extent) has been chipping away at the large discounts given to consumers. While Bharti’s headline tariff is around 90 paise a minute, thanks to large discounts, the realised tariff is roughly half this. With the reduction in discounts, effective tariffs for Bharti Airtel are up around 10-12% and, going by Vodafone’s press release on Wednesday, it is also likely to follow suit. Which is why Macquarie Equities Research’s note on telecom, released the day before the Bharti Airtel tariff news hit the headlines, pencils in a 3-4% compounded annual hike in revenues per minute and a steady recovery in Ebitda.
A large part of the turnaround, of course, could be seen from the September quarter results itself. While subscriber churn—the percentage of subscribers ditching their current telecom provider in favour of another offering lower tariffs or more free talktime—fell from 8.8% in Q1FY13 to 8.5% in Q2 for Bharti Airtel, the company also lowered the channel commissions (this lowered sales costs 100 bps and raised Ebitda margins) as it no longer felt it made sense to blindly chase customers through large dealer commissions. What has also helped is that, thanks to the poor response to the 2G auctions, the government has lowered the base price by around a third compared to the R18,000 crore Trai recommended for a 5 MHz spectrum slot—that is, the regulatory overhang on the one-time spectrum charge as well as licence renewal costs has come down significantly. Chances are the government will also be working on lowering annual revenue charges since, when combined with high upfront entry fees, the industry cannot possibly survive. Perhaps why the Macquarie report is subtitled “Upside calling, pick up”.