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The Loss Making Telecom Operators Stocks are Surging!

Will the sector revive through the steps ?

The Telecom Industry Oligopoly is facing crisis. Up until recently losses reported by Bharti-Airtel and Vodafone-Idea for Q2 FY20 are Rs. 23,045 Cr and Rs. 50,922 Cr respectively. In October 2019 the government issued an order for telecom operators to clear their AGR (Adjusted Gross Revenue) dues in 3-months tenure, which added to the losses. Bharti-Airtel and Vodafone-Idea AGR dues stand at Rs. 41,507 Cr and Rs. 39,313 Cr respectively.


The top telecom players Bharti-Airtel and Vodafone-Idea are already in the crisis after Reliance-JIO entered the industry in 2016 and gained the market share significantly with its low-price affordable data services. This forced the other telecom operators to reduce their tariff rates in order to sustain. Forced to lower the prices have caused massive cash flow crisis for Bharti-Airtel and Vodafone-Idea.


Telecommunication is a capital intensive Industry and hence needs huge cash flows for its Capex, mainly needed in technology advancements. The government plans spectrum auction for 5G services for around 8293.95 MHz of airwaves at an estimated base price of Rs.5.86 lakh Cr. With the upcoming 5G spectrum bidding the need for capital is going to rise.

The existing Debt burdens for Bharti-Airtel and Vodafone-Idea are Rs. 1.18 lakh Cr and Rs.1.02 lakh Cr respectively. Additionally a combined AGR due of more than Rs. 70,000 Cr none the less shows some serious concerns for these companies.


In order to increase the cash flows and come out of heavy losses Bharti-Airtel and Vodafone Idea announced tariff hikes from December, 2019. While low tariff seemed to be the only power play between the telecom operators since the launch of JIO, now it seems to change.

Reliance JIO along with other telecom operators has also shown an interest in tariff hike, but has assured that the price hike will not affect the data consumption adversely. This move by Reliance JIO seems unlikely as it could have been a great opportunity to lure more and more customers when the competitors were becoming costly. But what looks unlikely might be a strategic move by JIO. A tariff hike by all the telecom operators will still make Jio one among the all, less costly. Reliance JIO currently provides the cheapest data and mobile tariffs; even if it increases the price along with Vodafone-Idea and Bharti-Airtel it still turns out to be cheap for the users when compared with others. This will not only support a customer shift but will also increase JIO’s top-line due to tariff hikes. Reliance which has the highest market capital of Rs. 9.91 Tn in the Indian stock market is on the rise as the companies stocks surged post tariff hike announcement.


With saturation in subscribers’ growth, tariff hike will definitely increase the inflows. Hence Bharti-Airtel, Vodafone-Idea and Reliance JIO increasing the tariffs will only lead to customer shift. This might even lead to higher losses for the telecom operators losing the subscriber base due to the move in the upcoming quarter. If Bharti-Airtel and Vodafone-Idea fail to survive as a going concern, the telecom oligopoly will soon become a monopoly.


Despite such massive losses the Bharti-Airtel and Vodafone-Idea stocks are up by 7.47% and 35.96% respectively on NSE in intraday on 19th November, 2019. As the government tries to revive the distressed telecom sector, the investors have become bullish towards these stocks.


THINKING OF REVIVAL

In order to revive the telecom industry operators the government is planning to take some preventive measures. The CoS (Committee of Secretaries) will be consulting with the DoT (Department of Telecommunications) to come up with a floor price or minimum price for mobile data and calls, for all the telecom operators. This will keep the predatory pricing in check. Further the CoS is also thinking to give a relief to the telecom operators on license fees, and a relief in moratorium on spectrum payment. The decision on the above mentioned relieves is likely to be announced by December-January.


The government intervening as a savior, it seems that after imposing a floor cap on the mobile data and calls, the leverage that JIO was enjoying might fade. This might give a new turning point to the ongoing competition between major telecom operators Bharti-Airtel, Vodafone-Idea and Reliance JIO.


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©2019 by Equialpha Wealth Advisers