(IDEA IN, Mkt Cap USD4.1b, CMP INR10.2, TP INR9.3, 8% Downside, Neutral)
– Following Bharti and after months of expectation, VIL finally announced a tariff hike to the tune of 20% across its price plans, effective from 25th Nov’21. It is now important for RJio to follow suit to ensure sustainability of the tariff hikes.
– VIL’s ARPU, which stands at a mere INR109 (40% below Bharti), given the higher proportion of customers on lower base plans, could see a big push, provided it doesn’t see a huge market share loss. This hike, catering to ~70% of its revenue pool, can potentially offer an incremental EBITDA of INR38b (2QFY22 annualized), i.e. a 68% jump v/s 13% for Bharti.
– While there is a limited risk of downtrading, given the way the price plans are designed, there is a risk of steep market share loss similar to the last price hike (Dec’19), which saw a mere 20% flow through of the estimated EBITDA upside at INR15b.
– VIL’s cash flow crunch will get addressed provided the current subscriber churn is arrested, with INR80-100b of estimated annual capex and interest expense. It needs immediate funding for INR64b of NCD repayments due between Dec’21 and Mar’22.
VIL raises tariffs by 20%
Following Bharti and in line with our expectation, VIL raises tariffs by 20%, effective from 25th Nov’21. Its price plans are now similar to Bharti. VIL’s ARPU is merely INR109, 40% below Bharti, due to high proportion of customers (two-third) being on low base plans of INR79. This too has now increased to INR99, compelling consumers to recharge to higher plans, offering a huge push to ARPU. However, this may result in further consolidation of dual SIM cards, increasing churn.
EBITDA can see a steep 70% rise
The tariff hike caters to 70% of its revenue pool (excluding postpaid and the B2B business), thus offering incremental revenue/EBITDA of INR55b/INR38b (2QFY22 annualized), i.e. a 14%/68% increase. The hike should increase ARPU to INR128 v/s INR109 at present. The high operating leverage, given the low existing EBITDA margin of a mere 17% v/s Bharti’s 49%, should drive higher growth compared to Bharti’s 24% increase in EBITDA.
Risk of downtrading is low, but the churn is high
The price plans are designed in a way that there is lower risk of downtrading. At present, the majority of its subscribers opt for the 84/56 days (1.5GB) Data plans, which have limited option to downgrade. The next lowest plan offers 34% lower monthly outgo (i.e. INR179/28 day price plan), but reduces the Data allowance by ~95%, to merely 2GB/month.
Last hike saw a very low (~20%) flow through in EBITDA
The previous tariff hike of over 25% taken in Dec’19 saw an EBITDA increase of INR15b on an annualized basis (over 2Q-4QFY20), i.e. a mere 20-25% of our expected EBITDA upside. This is much lower than Bharti’s ~INR44b EBITDA increase, i.e. nearly 80% of our estimated EBITDA upside. This could be due to market share loss due to SIM card consolidation, despite similar pricing across peers. The estimated EBITDA increase runs the risk of significant EBITDA dilution due to market share loss.
Cash flow crunch partly addressed
The recent government moratorium on regulatory payment (spectrum and AGR) has offered VIL relief from the annual outgo of ~INR220b. The tariff hike will improve cash flows as EBITDA has the potential to increase to INR95b annually from INR55b to service its estimated annual cash requirement of INR80-100b towards capex and bank debt servicing. But the continued market share loss and subscriber churn could potentially derail the cash generation similar to the previous hike. In order to stabilize earnings, VIL needs large funding to significantly accelerate its current network investment of INR50b, which is much lower than Bharti/RJio’s INR150-200b annual India capex, despite their far deeper 4G network. It also has repayments of INR64b due over Dec’21 to Mar’22.
Valuation and view
Despite the pace of subscriber decline reducing in the past couple of months, the continuous churn in subscribers is making it challenging to sustain EBITDA. VIL’s weak liquidity position, despite the price hike, may force it to rationalize network investments, as evident from the lower capex intensity, which poses a risk of continued subscriber churn. The recent government relief package, followed by the tariff hike of 20%, may improve cash flows and attract capital. But the significant amount of cash required to service its debt, leaves limited upside opportunity for equity holders, despite the high operating leverage opportunity from improved ARPU. The current low EBITDA would make it challenging to service its debt without an external fund infusion. Assuming 11x EV/EBITDA and a net debt of INR1.9t leaves a limited opportunity for equity shareholders. We maintain our Neutral rating.