Airtel price hike: Discount cut positive, says Ambit Cap

In order to account for rising costs, India's top mobile phone carrier, Bharti Airtel on Wednesday informed that it has raised its voice call prices. Some reports suggest that the company has raised special value voucher prices by Rs 5 to Rs 15 while the free minutes offer for voice calls have been reduced by 10 to 25 percent.
 
Ankur Rudra of Ambit Capital believes it is certainly a positive newsflow because they were factoring in a continuous decrease in discounting levels over the course of Q4FY13 and FY14. However, he clarified that though discounting was favourable, indications of a rise in headline tariffs may have a negative impact on volumes because it is much more visible to the consumers. 
 
"We would see this as a sector-wide phenomenon as opposed to something that is limited only to Bharti," added Rudra.
 
Here is the edited transcript of the interview on CNBC-TV18.

Q: That's really just about two bits of information we have Newswire18. What are you making of it? Will this be the start of more such price increases? Are we going to see others follow suit?
A: This clearly is a positive newsflow for us because so far, we have seen that the relative level of discounting on vouchers was reduced in the December quarter. Our analysis of vouchers indicated that revenue per minutes (RPMs) were moving up by 3 to 6 percent. We did not expect a hike in headline tariffs so soon. We were expecting the discounting level to decrease continuously over the course of this quarter and over the course of FY14.
This is a combination of both reduction and discounting along with an increase in headline tariffs. It is a bit stronger than what we expected. The decrease of discounting is positive because typically it does not have a negative volume impact. However, the headline increase in tariffs tend to have a negative volume impact because it is a bit more visible to the consumer.
 
Q: How does this voucher price work exactly? That’s what you mean by discounting?
A: That's right. You will find that in the prepaid market, which account for close to 80 percent of industry revenues and 95 plus percent of number of SIMs in the market, there are a lot of discounted vouchers which reduce the effective tariffs for any consumer. The examples are around typical tariff pack reductions like minutes pack or seconds pack.
Historically, the discounting has been almost 50 percent to the headline tariffs. So for example, the average discount to tariff was around 25 paise for Bharti where the headline tariff would be 55 paise on a national basis. If that reduces, it helps the overall realised tariff. Q: This was actually spoken about on January 15 when there were those senior level management changes that were spoken about in Bharti. Give us a sense in terms of how much more upside do you see in the stock price considering it has already run up so much and that it has gained around 13 odd percent from the time of a possible news of a voice price hike?
A: Bharti at the moment is at our target price. Our target price was Rs 361. We don't see a substantial upside to it. The remaining upside would be a function of how much of the discounting is reduced. We still have very early numbers right now.
 
But, if the discounting is reduced substantially and there are headline tariff hikes, there could be a further upside from here. It will be difficult for me to quantify that before seeing the exact numbers and circles.
 
Q: Are you expecting this to be a strong round of price hikes?
A: Given where most of the competitors are, they would prefer to see tariff hikes taken by sector leaders to reduce their level of losses. Also we have heard from industry circles that Idea and Vodafone would view tariff hikes or reduction in discounting favourably.
In fact, in the last quarter we saw Idea and Vodafone also reduce the extent of discounting. We would see this as a sector-wide phenomenon as opposed to something that is limited only to Bharti. Q: What are your current forecasts with regards to the revenue and the margin picture for Bharti Airtel at this point in time and how much would you possibly change it around with this news?
A: My current revenue target for Bharti for FY13 is Rs 80,000 crore and earnings per share (EPS) is Rs 9.4. If this change is impacted right now, we will probably not see the full impact over the course of this quarter. We will probably see more of it in FY14.
We were at Rs 16.2 EPS for FY14 and therefore, if this flows through then we could see something in the region of a 5 to 10 percent upgrade. Again it depends a lot more on the quantum of the decline and discounting. Q: Despite the quantum of the price hike would you be a bit skeptical for them to actually sustain the price hike going forward, considering that other competitors could now act more aggressively?
A: One of the comments that exiting CEO, Sanjay Kapoor made in January was more than headline price it is the level of discounting in the market place that hurts them because headline price has little meaning if discounting compensates that. The focus on how much of average discounting actually exists in the marketplace would determine this and how the competitors react to it.
We think that the full impact will not be as positive as headline numbers suggest. There will be a level of discounting, but that’s being reducing so far. We would see a more positive scenario around tariff levels. Q: What do you see, more legs for this telecom rally which has already been fairly substantial and what will you ride on?
A: I think the telecom rally has been extremely strong and possibly captures most of the upside. We are not as positive right now given where the valuations are. Q: In terms of the parameters or the contours of the details, which we are still expecting on this news of the hike in voice call rates, what are the key parameters that you would watch out for and which would possibly be the most positive for Bharti?
A: The primary parameters to watch out for would be the level of network minutes, the volume in usage, whether usage or volumes have been impacted by the reduction in discounting that took place in the December quarter? If it has not been so, it would be positive. If it has been negatively impacted, then the follow through could be a bit more mixed.