Vodafone Idea shares: What Nomura says on free international roaming, peer Bharti Airtel

Vodafone Idea Ltd (Vi) is targeting subscriber growth and premiumisation, Nomura said on Monday as the telecom operator introduced free international roaming with its postpaid plans starting at Rs 501, annual prepaid unlimited data plans, and corporate plans starting at Rs 451 for enterprise customers. This is the first time free international roaming  has been offered on mass-market prepaid, postpaid and enterprise plans as a standard inclusion, rather than as a paid add-on pack.

For now, the foreign brokerage has maintained 'Neutral' rating on Vodafone Idea, given significant valuation premium against Bharti Airtel Ltd, saying the cash flow situation remained stretched. On Monday, the stock was down 2.83 per cent at Rs 13.88 apiece amid a broader stock market fall.

Nomura expects a slightly higher 15 per cent Ebitda CAGR for Vi on a lower base amid improving operating metrics. Bharti Airtel Ltd remained its top pick among the telecom stocks.
 
"We think that the latest differentiated offering from Vi is unlike what the telecom operators currently offer via bundling such as OTT, software, cloud, and Al model subscriptions. In international markets such as the US, Singapore, and the EU (by law), inclusive international roaming has been a mainstream plan feature for years," Nomura noted.

The domestic brokerage said the strategy could be aimed at attracting premium customers from Bharti Airtel Lt and Jio.

"For prepaid customers, since the free IR is only applicable to annual plans, it may also help Vi to nudge its existing premium customers to move to
annual recharge plans, thereby helping reduce churn and also help improve working capital (much needed, given Vi's tight cash flow situation)," Nomura said.

The brokerage said it is a smart move by Vi aimed more at subscriber retention and growth by sacrificing a bit on average revenue per user (ARPU), though overall revenue may be positively impacted due to improved traction on subscriber growth.

The foreign brokerage noted that Vi has also not responded to Airtel's plan restructuring announced in mid August, implying that the focus currently is subscriber growth, rather than ARPU expansion.

At present, absolute revenue from international is in low single digits.  Airtel is most exposed to the shakeup. International roaming revenue across Indian telcos generally contributes a small fraction, say 1-3 per cent globally, though none of the Indian telcos give the breakdown of total carrier revenue.

Bharti Airtel's 8 per cent postpaid subscriber as a percentage of total against 6 per cent for Vi (ex-M2M), implying Bharti is more exposed to IR related revenue loss if bundling becomes an industry norm in the future, Nomura said.

"In the near term, there may be minor revenue losses for telcos, but we think that with industry subscriber growth largely saturated, all three telcos would want to earn more from existing users, and premiumization is a way to achieve that. Vi's aggressive IR bundling may be a minor irritant for Bharti, which we think may wait to see the response and launch a similar bundled plan later," Nomura said.