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Last Updated : Sep 25, 2012 04:13 PM IST | Source: CNBC-TV18

Tariff hike by telcos may drive revenue growth: IIFL

GV Giri, analyst at IIFL Institutional Equities believes the tariff hikes would not influence their sales volumes too much but, may result in some revenue growth given the low price elasticity.


Telecom operators like Bharti Airtel and Reliance Communications have announced tariff hikes recently. GV Giri, analyst at IIFL Institutional Equities believes the tariff hikes would not influence their sales volumes too much but, may result in some revenue growth given the low price elasticity.


Moreover, since all the operators have not raised rates, it may not lead to serious earnings upside for the sector as a whole. In fact, if Reliance alone hikes tariffs and others do not, there might even be a risk of diverting customers to other operators. 


At the moment, IIFL has a reduce call on Reliance Communications due to its poor financial performance.


Here is the edited transcript of the interview on CNBC-TV18.


Q: How are you looking at this ability to hike rates, will it get compensated by lower sales and therefore the net is a zero sum game?


A: The general feedback from operators in the last few quarters has been that elasticity is very low and therefore, this tariff hikes should not influence volume too much and there might be little bit of revenue growth.


Q: What kind of earnings growth will you give for instance Reliance Communication, which has been the latest to announce these hikes?


A: When one operator hikes tariffs and others don’t follow then there is a differential building up which might divert the traffic away from the operator that has hiked rates. We haven’t yet seen all operators raise rates in a co-ordinated manner. If that happens, there could be some serious earnings upsides coming through for the sector. But as of now, just one operator hiking rates is not good enough to say that earnings will go up for that operator.


Q: Would you sense this is as the start of a trend, did you already buy into some of the stocks in anticipation that both revenues and average revenue per user will go up?


A: Yes I think it will go up from these levels, at least over the next 12 months. Beyond that it is not possible to predict. One has to be a little cautious because hiking some plans by 20-25% is possible but, the overall rate per minute might increase by only 5-6%. At that point, enough number of marginal players will swing into a zone of profitability and the aggression will start with a new wave.


Q: You have a buy on Bharti Airtel and Idea Cellular but why do you have a reduce on Reliance Communications?


A: We have seen the company not report strong earnings and EBITDA growth. When we see the first signs of that beginning to turnaround, we will seriously consider upgrading. But, the other companies have fought past some of the industry challenges a little better.


Q: What has bedevilled this sector, so much been under cutting in the last couple of years and more regulatory overhang? What would you watch out for in that space for the two stocks on which you have a buy or has the bad news played out?


A: Until such time that the market had hopes that the reserve price would come down or some easier conditions would be set, there was some optimism. But once the base price was frozen by the government, I thought it got built into the price fast. Now the negative surprise on the regulatory front can only be if some unanticipated spike in prices in the auction is seen. I rate the probability of this as very low.

But, what may happen on the tariff front can be a significant positive. The market can see improving fundamentals and if that improvement happens as I expect it to, the upside can be much bigger than any downside on the regulatory front incrementally.

First Published on Sep 25, 2012 11:32 am
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