Telcos have headroom for more 15% tariff hikes in FY27, says JPMorgan; raises target for Bharti Airtel, Vodafone Idea

Telecom companies including Bharti Airtel and Vodafone Idea have the headroom to take another 15% tariff hikes in FY27 due to affordability of service as compared to other Asian countries, and a benign regulatory environment, analysts said.

The unfavorable ruling by the Supreme Court last month in the Adjusted Gross Revenue (AGR) case necessitates annual tariff hikes for beleaguered Vodafone Idea to be able to pay the spectrum dues, including AGR dues outstanding, according to analysts at JPMorgan.

The foreign brokerage house highlights that Indian data yield stays the lowest in the region at $0.09 per GB, sharply below trend adjusted for GDP per capita. Moreover, mobile fees or Average Revenue Per User (ARPU) as percentage of GDP also remains one of the lowest at 0.7%, almost a decade since Jio’s launch.

“This provides headroom for successive rounds of tariff repair. We bake in tariff hikes of 15% in FY27E given sustained conditions for tariff repair,” JPMorgan said.

It expects tariff hikes of 15% in FY27E for the three telcos – Bharti Airtel, Bharti Hexacom and Vodafone Idea. For the second quarter ended September 2024, it expects subscriber losses for incumbents Bharti Airtel and Vodafone Idea, however, ARPU is expected to enjoy flow through of recent tariff hikes.

JPMorgan upgraded the rating for Vodafone Idea and raised target price for all four telecom stocks. Its new pecking order is Indus Towers, Bharti Airtel, Bharti Hexacom and Vodafone Idea.

Bharti Airtel

Bharti Airtel is JPMorgan’s top pick in the telecom sector. It bakes in another tariff hike of 15% in FY27E driving up India wireless revenues/EBITDA by 5-6% and margins by 50 bps for FY27E. It increased target EV/Ebitda multiples to 12.5x from 11.5x, rolled forward to December 2025 and raised Bharti Airtel share price target to ₹1,920 apiece from ₹1,670 earlier.

It remains Overweight on Bharti Airtel stock as continues to expect the telco to start paying meaningful dividends from FY25 as FCF improves and de-leverage occurs.

Bharti Hexacom

JPMorgan increased revenues and Ebitda estimates by 4-5% in FY27E as it bakes in another 15% tariff hikes. It has ‘Overweight’ rating on Bharti Hexacom shares and increased target price to ₹1,580 apiece from ₹1,330 earlier.

Indus Towers

Indus Towers is JPMorgan’s overall top pick in Telcos and Tower companies. It believes Vodafone Idea’s monthly payments should continue to remain on track along with continuous tower additions in FY25. The brokerage firm increased its target EV/Ebitda multiple to 9x from 8.5x, and Indus Tower stock price target to ₹525 from ₹500 earlier, with ‘Overweight’ rating.

Vodafone Idea

JPMorgan upgraded rating to Neutral from Underweight and raised Vodafone Idea share price target to ₹10 per share from ₹7 earlier.

“We bake in another tariff hike of 15% in FY27, increase our target EV/Ebitda multiple to 12x (from 11.5x) and roll fwd to December 2025. Vodafone Idea is still in the early days of proving the success of its strategy that will begin with capex rollout, followed by arresting subscriber losses before regaining share. We will wait for proof of success in arresting subscriber losses and balance sheet exposures before turning more constructive,” JPMorgan said.

Telecom Sector Q2 Results Preview

Bharti Airtel is expected to report 6.7% quarter-on-quarter (QoQ) growth in India wireless revenue led by 9% increase in ARPU counterbalanced by subscriber churn of 1.2 million. The brokerage firm expects Bharti Hexacom to report 6.1% QoQ revenue growth led by 7% increase in ARPU while subscriber should decline 0.2 million.

Vodafone Idea is estimated to report 5.7% QoQ revenue growth led by 8% ARPU growth while subscribers should decline by 4 million. Indus Towers is expected to report 4% QoQ growth in revenue led by tower additions.

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