When Jio launched its 4G services in late 2016, the focus was on significantly lower data prices and a step shift in the ability to stream videos. But Jio's entry also shook up the incumbents- Vodafone, Idea and Bharti Airtel.

It was the death knell for Reliance Communications, which was reeling under the pressure of massive debt and the legacy CDMA technology. With significant cash flows coming from its petroleum and refinery business, Reliance Industries, through Jio, rapidly gained an upper hand over Airtel, Idea and Vodafone.

The onslaught was so serious, that Idea and Vodafone decided to merge into a combined entity called Vodafone Idea.

On October 24, the Supreme Court ruled in favour of the Department of Telecom on a new method of calculating licence fees and spectrum charges, known in industry parlance as ‘AGR liabilities’.

The telecom companies were suddenly faced with a combined liability of Rs 1.33 lakh crore (including interest), to be paid within three months. This was a body blow to the incumbents who were already dealing with tariff wars and financial stress.

The government did step in and announced a two-year moratorium on spectrum payments, giving breathing room to Bharti Airtel and Vodafone Idea.

Vodafone Idea and Bharti Airtel, declared their second-quarter results for this fiscal. The former posted losses of about Rs 50,922 crore, while the latter's losses were around Rs 23,045 crore for the July-September quarter due to AGR liabilities. Vodafone Idea has set aside around Rs 25,000 crores for its AGR liability, while Bharti Airtel has provided for Rs 28,000 crores.

As a response to the court order, Reliance Jio, Vodafone Idea and Bharti Airtel have all raised tariffs. While Bharti Airtel and Vodafone Idea hiked rates on plans by up to 42 per cent beginning December 3, Jio said that is plans will cost 40 per cent more, starting December 6. Tariffs of Vodafone and Airtel will be at a premium of 8-25% to those of Jio.

The recent tariff hike finally offers some respite to the beleaguered telecom operators. According to analyst estimates, post the tariff hikes, the industry’s revenue will only be 10% higher five years ago. Jio’s decision to also participate in the market repair ensures sustainability of the recent price hikes. This might be the beginning of a virtuous upcycle in telecom after a hiatus of almost 5 years.

Post the price hikes, the key issue concerning the sector currently is AGR liabilities where clarity is expected through the legal route. Both Bharti Airtel and Vodafone Idea have filed a limited review petition in the SC for relaxation on AGR dues. To provide for AGR liabilities, Bharti Airtel has made an announcement of raising US$3bn.

According to estimates, Jio is likely to see the highest increase in revenue from the recent tariff hikes due to the large proportion of smartphone users in its base. Bharti Airtel and Vodafone too are likely to see over a 40% and 100% increase in EBITDA respectively next year.

However, due to huge debt and AGR liabilities, both Vodafone and Idea have hinted that they would have to consider closing down if the government does not intervene and provide relief. Bharti Airtel is expected to be free cash flow positive on account of the tariff hikes.

During earlier tariff hike cycles, players with superior execution and healthier balance sheets have created significant value. Bharti with its agility and superior execution is the preferred pure-play telecom pick. If someone would like to play the telecom story through Jio, then Reliance Industries would be the stock to choose.

Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.

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