Goldman Sachs Cuts Price Target On Vodafone Idea To Rs 3.30

After TRAI data on subscribers and a reduction in tariff rates by Jio, there has been intense competition pressure on Bharti Airtel and Vodafone Idea, amid existing burden of AGR (adjusted gross revenue) dues.

Goldman Sachs has, however, raised its 12-month price target on Bharti Airtel and Reliance Jio to Rs 625 and Rs 2,325 per share, respectively, but downgraded only Vodafone Idea's price target to Rs 3.30 citing government intervention, asset divestments and current tariff environment as core reasons for its decision.

The brokerage believes that the pricing is not a big factor because Jio has not cut the price of its existing Rs 199 plan but introduced new plans, which is not the start of a "tariff war".

Earlier this month Jio announced a reduction in effective tariffs in the fixed broadband segment, forcing Airtel to follow suit. The telecom arm of the Mukesh Ambani-led conglomerate also announced new tariff plans for the postpaid mobile segment with a number of freebies.

The brokerage believes that there will a tariff hike before the end of 2020. "Almost the entire revenue base of Jio is prepaid, with c.80 percent of that coming from smartphones (c.50 percent for Airtel and Vodafone). Thus, any tariff cut in this segment , or delay in tariff increase , would impact Jio's revenue/EBITDA the most. Jio not needing to raise tariffs has been a consistent investor pushback," noted Goldman Sachs.

However, in case of no tariff hikes, the brokerage expects market erosion for Vodafone Idea considering its current EBITDA run rate is 75-80 percent lower than what the company needs to pay all its obligations starting in 2022. This could result in a Rs 188 implied value per share addition to Bharti Airtel.

The share price of Bharti Airtel has seen a significant correction from Rs 550 at the start of the month to Rs 442.40 at Monday's close. Competition from Jio, coupled by hopes of survival of Vodafone Idea after the Supreme Court's final ruling in the AGR case added pressure on the stock.

However, Goldman Sachs has a "buy" call on Bharti Airtel as it feels that the telco can sustain double-digit EBITDA growth for the foreseeable future along with upside risks from higher-than-expected tariff hike and market share gains from Vodafone Idea.

TRAI data released last week showed that Vodafone Idea Ltd (VIL) and Airtel lost about 48.2 lakh and 11.3 lakh users respectively in June, while Reliance Jio added nearly 45 lakh customers.