MUMBAI (NewsRise) -- Shares of Bharti Airtel, Vodafone Idea, and Reliance Jio Infocomm parent Reliance Industries surged Monday amid bets that the operators' move to raise call rates by more than 40% will provide a much-awaited breather to an industry rattled by years of cut-price competition.
Both Bharti Airtel and Vodafone Idea increased the prices of their popular prepaid call tariffs by up to 41%, while Reliance Jio said it is increasing prices by up to 40%. The higher tariffs are effective starting Dec. 3, all the three operators said in separate statements on Sunday.
The higher-than-expected tariff hikes cheered investors, sending shares of Bharti Airtel up 3.7%, and that of Vodafone Idea up more than 14% in Mumbai trading. Reliance Industries gained 2.3%. The benchmark S&P BSE Sensex index closed little changed.
The hikes are expected to bulk up the free cash flows of Bharti and Vodafone Idea and cushion the impact of an impending $13 billion payment owed to the Indian government by mid-January, say analysts. While raising the tariffs, Bharti and Vodafone Idea have also hedged their risks of customers falling back to lesser-priced plans by taking away some of the cheaper offerings.
Brokerage Emkay expects the average revenue per user of Bharti and Vodafone Idea to increase 28% and 31%, respectively, in fiscal year 2021, and 7% and 10% over the next year.
The upshot of tariff hikes is "a possible path to improvement in profitability and balance sheet repair over the next few years," Morgan Stanley said, adding that Bharti is likely to be a key beneficiary of the move along with Reliance Jio. It upgraded Bharti shares to overweight from equal weight, and raised its target price by more than 29% to 530 rupees a share.
India's telecom industry has been roiled by intense price competition triggered by the entry of Reliance Jio more than three years ago. The new carrier offered free calls and cut-rate data plans for months together, eroding the revenue and profitability of rivals that were already grappling with the high cost of spectrum, burgeoning debt, and unfavorable policies.
Last week, the government offered the cash-strapped telecom operators a two-year moratorium on the payment of spectrum charges for the next two fiscal years until March 2022, in a move that is set to help them ease their cash flows.
But the arrangement is expected to offer the least bit of help to Bharti and Vodafone, which racked up combined losses worth $10 billion in the last quarter, after they set aside money to adhere to a Supreme Court order that upheld the government demand for $13 billion in unpaid dues and interest.
"While a price hike is much needed, it does not fully resolve the near-term cash flow issues for Vodafone Idea," Morgan Stanley said. It expects Bharti and Reliance Jio to increase their market share in the medium term.
Some analysts warn that an increase in tariff will crimp data usage. Video-streaming services suggest consumers rarely top up data packs to continue watching shows, brokerage Jefferies said. "Direct-to-home services have faced wallet issue historically," it said.
Further, global trends also indicate "high elasticity of data usage to pricing," it said, adding that higher prices may lead to consolidation of SIM cards and a shift to cheaper call tariff plans.
However, given the likely increase in average revenue per user, Kotak Institutional Equities is penciling in additional operating earnings worth up to 95 billion rupees ($1.32 billion) for Vodafone Idea and 85 billion rupees for Bharti Airtel.
--Dhanya Ann Thoppil