The December quarter (Q3FY23) financial results of telecom companies are going to be weak. A key factor driving this would be a modest sequential increase in average revenue per user (Arpu) due to lack of tariff hike and slower gains from premiumisation.
In addition, subscriber growth for the region is expected to decelerate in the third quarter, led by SIM consolidation.
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Analysts believe that the sequential growth in Reliance Jio’s subscriber base may normalize to 5-6 million in Q3 as compared to the 8-10 million growth seen in Q1 and Q2.
On the other hand, the subscriber base of Bharti Airtel Limited is likely to remain flat or post marginal growth. But Vodafone Idea Ltd will continue to lose customers in the third quarter.
There is some cushion on margins in the third quarter from savings on spectrum usage charges, but higher operating costs for the 5G rollout could negate the gains to some extent.
Investors would do well to watch for management’s commentary on tariffs and 5G expansion. Indeed, the tariff hike is a major catalyst for any rally in telecom stocks. From their respective 52-week highs, Airtel and Vodafone Idea shares are down 11% and 46%.
The road ahead will not be easy. “We believe there is more uncertainty over tariff hikes in the near term, given that large capacity creation with 5G will focus on boosting usage. Also, focus on market share will increase amid growth of data subscribers and Vodafone Idea’s deteriorating health,” analysts at Jefferies India said in a report on January 10.
Given the weak position of Vodafone Idea, the company’s efforts to raise funds can be monitored. The telecom sector risks turning into a monopoly if it doesn’t expand its 5G network in line with its peers.
Meanwhile, 2023 will see an acceleration in the pace of 5G network rollout.
“Operators are set to encourage customers to adopt 5G handsets by offering bigger data allowances and better speeds. As the network stabilizes, we will be watching efforts to monetize 5G,” said Kunal Vora, head of India equity research at BNP Paribas Securities India.
“Operators may offer plans that will require customers to pay a bit more, but are likely to keep 5G plans much cheaper on a per GB basis,” Vora said in a report.
While all this augurs well for telcos, investors should keep an eye on how margins shape up.
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