Will Bharti Airtel be able to take the ROCE level above 15%?4 min read
Bharti Airtel’s CEO Mr. Gopal Vittal in a recent interview talked about how the business is going to work out in the future, what all challenges change to be there, how to change the business to be future-ready, how to focus on cash flow, how to increase cash flow, and how to focus on return ratios. So, let’s discuss the same in brief in this article as we move ahead.
Tariff Hikes, ROCE, and Debt:
- The CEO said that another tariff hike can be seen in Calendar Year 2022. The recent price in December month can be seen in the average revenue per user (APRU) which stands at Rs. 163 and the target for the future are Rs. 300 per user which will not happen in the current year but take some 2-3 years to achieve this target.
- The company plans to increase the next price hike after the SIM consolidation i.e., conversion of 2G sim to 3G or 4G SIMs which create a loss of customers due to multiple reasons like some people having two sims may close one sim or in rural areas, people cannot afford hike prices of 4G tariff which may close their SIMs
- The next tariff hike that the company might take, the ARPU will be near Rs. 200. The last hike was in the month of dec which increase the ARPU but not very much as just a one-month hike impact was accounted for in APRU. For Q4 the increased hike for 3 months will increase the ARPU to Rs. 175-180 per user.
- The price hikes as a consumer are not good because the customers have to pay more but if we go last 10 years and see, then a lot of consolidation has taken place in the telecom industry which many players came and vanished away.
- Currently, there are 3 major players (Jio, Airtel, Idea-Vodafone) with BSNL being 4th. 40% of the total revenue market is controlled by Jio and 37% is with Airtel which can be seen as a duopoly kind of market.
- The government says they can’t allow a duopoly market in the telecom sector. There was a big pricing war between the telecom sector and if this would have continued then Idea-Vodafone would have vanished which would have created a problem for the other two major players as the government don’t want a telecom duopoly market and could have changed the regulations creating more problems for Jio and Airtel. Moreover, the government won’t allow a free-market duopoly and will be a regulated duopoly but allow companies to have a sustainable profit.
- The question stands then why do telecom companies want to make the ARPU at Rs. 300 per user? This is because the Capex these companies have made want their Return on Capital Employed (ROCE) should be more than or around 15% which is sustainable. The current ROCE for Airtel is 12.3%.
- To increase the ROCE, their revenue should also increase subsequently which is a challenge as adding new customers which were in crore before, is now not going to happen as a lot of markets are already getting captured. The second challenge is with the D/E ratio of airtel which is at 3 i.e., for every ₹1 equity company has raised Rs. 3 Debt which is not sustainable.
- To service this debt, the interest coverage ratio of the company is 1.5 times. Generally, the interest coverage ratio should be 2.5 times for such high debt and from that point of view, this company will not get shortlisted for being in the portfolio. But for such high debt is the company doing anything to sustain the answer is yes, they are increasing the tariff and want to increase the ARPU to Rs. 300 over the period. As the revenue increases per user, the higher revenue will be used to repay the debt and reduce the D/E ratio. The long-term target of the company is below the 1 D/E ratio. In the future, the interest coverage ratio can be 4-5 times or higher than that.
- Regarding 5G the company has not mentioned anything but the company said there will be no additional cost involved in the 4G business.
What Should Investors Do?
The approach of fully setting up the 4G Services first, and then moving ahead to 5G services looks quite practical. Whereas the company’s focus on increasing ARPU, reducing debt, and managing a decent Interest Coverage Ratio will surely benefit the company for a business as a whole. Also, the target of taking ARPU to Rs. 300 per user in the coming period will surely help the company to take its ROCE to the desired level.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.