5G auction, flat subscriber growth may weigh on Airtel, Voda Idea stocks

Amid flattish subscriber growth, and cost-heavy 5G auction, analysts believe the near-term stock performance of Bharti Airtel, and Vodafone Idea, may remain subdued. The stocks, including Reliance Industries (Reliance Jio), however, remain a medium-to-long play.

“While one can expect the Indian telecom industry to set out on an exemplary path of expansion over the next couple of years, the sector’s immediate prospects appear underwhelming. However, the sector holds enough promise to over-compensate in the medium-to-long term,” said Nirav Karkera, Head-Research at Fisdom.

Data from Telecom Regulatory Authority of India (Trai) shows that industry-active subscriber base dipped 7.8 million month-on-month (MoM) in April 2022 with Bharti Airtel down by 3.1 million, its worst performance in the past 12 months. Reliance Jio’s (RJio) lost 0.1 million active subscribers, while Vodafone Idea saw active subscriber base decline by 3.8 million. 

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“The industry’s active subscriber base saw a sharp fall in April, 2022, which was seen across all telcos. This probably suggests that the November, 2021 tariff hike-led sim consolidation is still not over,” pointed out JM Financial.

5G auctions

Analysts believe the terms and conditions of the upcoming 5G auction are a mixed bag for telcos, and they expect players to bid within limited circles. Trai had cut the reserve price across bands by 40 per cent for a 20-year license period, with the 700MHz/3300-3600MHz – the two key 5G bands – seeing a 40 per cent/36 per cent price cut versus their respective previous reserve prices.

“The industry has been aggressively pitching for a drastic 80-90 per cent cut in spectrum prices to proactively participate in the 5G auction. Given this, there is a risk of telcos engaging in heavy investments to match competition. This can be a key overhang on stocks,” said analysts at Motilal Oswal Financial Services in a recent note.

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For Karkera of Fisdom, the bidding action may be underwhelming even as the industry is expected to shell out upwards of Rs 1 trillion in the upcoming auctions.

“With Vodafone Idea grappling with fundraising challenges and the government on track to convert its debt to equity before the auction, participation from the cash-strapped telco is expected to be rather tepid and limited to select circles. However, the unlisted Reliance Jio and Bharti Airtel enjoy healthy balance sheets, which offer them significant monetary firepower to fuel their aggressive growth plans,” he added.

Moreover, given the nascent 5G ecosystem, and evolving use cases, analysts think 5G rollouts would likely be granular.

That said, duration of right-to-use spectrum unchanged at 20 years; payment option eased with the introduction of 20 equal annual instalments; Spectrum Usage Charges (SUC) reduced to nil; spectrum surrender norms issued without penalties; and allowed spectrum leasing for captive non-public network are some of the positives for telcos.

“The pan-India 100MHz spectrum in the 3,300MHz band would entail nearly Rs 2,800 crore annual spectrum outgo for 20 years. Further, scrapping of SUC could lead to around Rs 3,000 crore in annual cost savings for R-Jio and Bharti, and Rs 1,400 crore for Vi in the longer term at current annualized run-rate,” said Aditya Bansal of Nomura.

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“With organic cash flow, ongoing rights issue, strategic stake sale, improved market structure in India wireless, and easier 5G spectrum payment terms, Bharti remains well-placed to compete with R-Jio (Unlisted) on 5G rollouts. However, despite the cabinet approval for no upfront payment and scrapping of financial bank guarantees, we believe Vi could restrict its bid for 5G spectrum to select circles, given its capex constraints, much delayed fund-raising, and existing gaps in 4G coverage,” Nomura said.