Reliance Jio (RJIO) today announced an unconventional price hike that
recovers interconnect usage charge (IUC) for off-net calls (calls to other networks) from subscribers in the form of additional recharge vouchers. Ceteris paribus, this works out to a price hike of about 14%. Still, we believe that additional charges for off-net calls would disincentivize users to call other operators, which would reduce off-net call volumes for RJIO. We assume additional charges to drive up revenue ~5%, which would translate into a ~10% increase in EBITDA. We consider the tax hike from the price-setter is positive for the telecom industry and will provide other operators leeway to hike prices proportionately. As highlighted in our Daylight again report, we anticipated a price hike by RJIO in H2FY20. But the approach the price hike has been taken is perplexing considering it may cause inconvenience and anxiety to subscribers. Other operators may follow the action, but by simply raising the tariff.
Sector outlook: Finally a tariff hike
RJIO has finally taken an unconventional a price hike with a caveat that it will stop charging off-net calls if TRAI reduces IUC charges to zero. We expect RJIO to take further tariff hikes for higher payouts towards InvIT—to fund incremental CAPEX for its FTTH business and bring down net debt. Significant funding to RJIO to grow market share remains the key risk to our thesis. At the current level, Bharti is trading at 4.6x FY21E EV/EBITDA; maintain ‘BUY/SO’ with a target price of INR414. The idea is trading at 7.4x FY21E EV/EBITDA; maintain ‘HOLD/SP’ with a target price of INR7.
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