Telecom: Upgrading Vodafone Idea and Indus Towers

Analysts of IIFL Capital Services upgrade Vodafone Idea (Vi) to ADD with Rs14 TP and recommend subscribing to the FPO. Analysts of IIFL Capital Services also upgrade Indus Towers to BUY with Rs379 TP as it would benefit from Vi’s improved financial position and subsequent rollouts, as well as potential reinstatement of dividend. Analysts of IIFL Capital Services see two rounds of tariff increase in the next three years, which will benefit all three telcos. There is a decent chance of a reduction in AGR liability, a positive for Bharti and Vi. Based on the above factors, analysts of IIFL Capital Services raise Bharti’s TP to Rs1379 from Rs1215 and JIO’s EV to US$104bn from US$96bn.

Analysts of IIFL Capital Services see two rounds of tariff hikes in the next three years:

Analysts of IIFL Capital Services believe that tariff hikes are imminent post elections, driven by the need for improvement in return ratios as RIL is likely to consider an IPO of JIO Platforms. With the government keen on ensuring a three-player market, analysts of IIFL Capital Services do not see the regulator frowning upon tariff hikes. Notwithstanding the weak spending environment in low-income and rural segments, we expect down-trading to be limited considering the staple nature of telecom. Limited churn and healthy revenue boost seen post Bharti’s 56% entry level tariff hikes in H2FY23 (subsequently followed by Vi) also support this.

Vi – FPO price offers reasonable upside; upgrade to ADD:

Equity infusion in Vi (to be likely followed by debt raising) is likely to result in Rs450bn funding and should enable Vi to narrow the 4G coverage/capacity gap with peers. This would not only arrest sub losses but also enable faster upgrade of 2G users to 4G. Direct tariff hikes, coupled with this upgrade, should drive Vi’s ARPU from Rs145 in Q3FY24 to Rs241 in FY27. There is a decent chance of a favourable verdict in the AGR curative petition (analysts of IIFL Capital Services assume 50% liability relief on ~Rs700bn AGR dues). If analysts of IIFL Capital Services assume Rs350bn government dues getting converted into equity, Jun-25 TP comes to Rs14/share. Analysts of IIFL Capital Services also conduct a sensitivity analysis to multiple variables, which suggests limited downside risk from the FPO price.

Indus Towers – Removal of overhang on a key client and a beneficiary from Vi’s rollout:

Analysts of IIFL Capital Services estimate Vi to raise its mobile broadband location count from the current ~170k to 250k over the next two years. Analysts of IIFL Capital Services expect Indus to garner ~80% of the same, which should boost its tenancy ratio to ~1.95x from the current 1.7x. Their TP rises to Rs379 even before factoring in any potential realisation of overdue receivables of Rs60bn+ from Vi. Analysts of IIFL Capital Services expect Indus to reinstate dividend from FY25 as it again starts generating healthy FCF (dividend payout policy is 100% of FCF). The stock is attractive at 4.5%/7.2% FY25/26 dividend yield.

Bharti and JIO to benefit from higher-than-expected tariff hikes; Bharti may also gain from reduction in AGR dues:

While analysts of IIFL Capital Services were already building 20% tariff increase in H2FY25, we now build in another round of 15% tariff increase in FY27. They also assume ~150bps lower steady state RMS for JIO and Bharti vs. earlier, considering a more competitive Vi. If analysts of IIFL Capital Services assume similar AGR relief as Vi, Bharti’s Rs360bn liability could halve. The above assumptions result in Bharti’s TP rising from Rs1215 to Rs1379 and JIO’s EV from US$96bn to US$104bn.