- Wealth PMS (50L+)
One of the most awaited events in the telecom sector currently is the ‘Tariff Hike’.
The market has been expecting this for the last six months or right from the time when the Supreme Court ruled out the possibility of self-assessment of dues in the AGR case. However, to markets disappointment, it is yet to happen.
Six months back we at CapitalMind, had predicted that a tariff hike is imminent but unlikely to happen anytime soon. It was imminent not only because the telecom regulator was mulling to introduce floor tariffs, but also because Vodafone Idea’s survival hinged on it.
Floor tariff is a price below which no telecom operator can offer its services.
So why was it delayed: Covid-19 pandemic, the economic slowdown in the country, and the retirement of earlier TRAI chairman RS Sharma have so far led to a delay in tariff hike.
The last tariff hike was initiated by Vodafone Idea on December 1, 2019, and the other two operators – Bharti Airtel and Reliance Jio – followed suit. The full benefit of the tariff hike was realised in the subsequent quarters.
In December last year, the telecom companies took a tariff hike of around 30-35%. However, the tariff hike translated into the highest ARPU growth of 27%, that too, only for Bharti Airtel. For the other two players, the result of the tariff hike was limited. This was because of downtrading by customers – opting for lower ARPU plan, and because of discounts offered by telecom operators.
ARPU growth coupled with growth in customer base resulted in 31% growth in its core revenue. For Reliance Jio the core revenue growth was higher on the back of customer additions.
Adjusted gross revenue means gross revenue adjusted for inter-connect usage charges and other deductions. AGR plus national long distance (NLD) revenue is part of core mobile revenue.
The company which benefitted the least out of tariff hike was Vodafone Idea. This was not only because of downtrading and discounts but also because it lost nearly 4 crore subscribers. This shows the underlying weakness in operations and the fact that tariff hike is not the only solution to revive Vodafone Idea.
According to an Economic Times report, Vodafone Idea has got an initial proposal for up to ₹ 15,000 crore line of credit from a consortium led by US investment firm Oak Hill Advisors. The funds are likely to be disbursed in tranches linked to the company meeting stiff, periodic business targets on operating income, subscriber growth, average revenue per user (ARPU), and revenue market share fronts.
To meet these steep targets, the company will have to hike tariffs. Had it not been for this fundraising, the company still needs to hike tariffs to survive in the Indian telecom market.
Now going by the latest revenue market share trends, it appears as if the fight to win over market share has more or less stabilised. In the September ended quarter, the revenue market share of telecom operators has remained largely unchanged.
Moreover, in the September ended quarter, even the market leader – Reliance Jio – showed signs of growth saturation. Its quarterly subscriber addition was the lowest ever since the company started operations.
This makes it pretty evident, that whenever a tariff hike is initiated, Reliance Jio will also participate as the same will fuel the next leg of growth.
(Bharti Airtel has explicitly said that if there is a tariff hike by a competitor, then the company will participate. However, Reliance Jio has never made any such comments.)
Earlier due to the pandemic induced economic slowdown, the telecom companies could not resort to a tariff hike. However, as the lockdown rules have been relaxed the economy is opening up. Also, December month would mark one-year anniversary of the tariff hike.
These factors could well prompt the telcos to go ahead with a tariff hike now.
Given below is a scenario analysis of how a 15%/20%/30% higher ARPU would have benefitted the telecom companies in Q2FY21. However, as seen earlier, to achieve such ARPU growth, the tariff hike needs to be higher. Also, the entire benefit of the tariff hike would not be realised in one single quarter.
Last year, a 30-35% tariff hike resulted in a 27% ARPU growth at best that too in four quarters.
According to our analysis, if the ARPUs in the Q2FY21 would have been higher by 15%/20%/30%, then the EBTIDA would have been higher by 25%/33%/50% for all the three private telecom companies in India.
Without a doubt, a tariff hike is the next big trigger for the telecom companies in India but timing the same with any precision is difficult. Hence, in this last part, we discuss the other possibilities and who stands to benefit from it.
This situation will not harm India’s number one and two telecom operators but will definitely hurt Vodafone Idea.
No tariff hike could lead to Vodafone Idea’s insolvency, which in turn will benefit the existing operators – Airtel and Jio – as it presents an opportunity to grab market share. Both Airtel and Jio are under no pressure for an immediate jump in ARPU. However, if initiated, it would be rational for them to participate.
Now a price cut would definitely lead to Vodafone Idea’s insolvency, a bit faster though. However, it’s no longer a rational choice even for Jio as the incremental absolute gains from subscriber additions may not be enough to compensate for the hit taken on the existing revenue base. No doubt there would be market share gains from the quick demise of Vodafone Idea, but even a status quo on pricing would achieve this objective with much lesser cost to self.
Given the fact, that either of two scenarios will lead to the non-existence of the Vodafone Idea, even the Indian Government would look to push for a tariff hike. This is because the shutdown will hurt them the most. More than four-fifth of Vodafone Idea’s total debt is owed to the Government of India in form of deferred spectrum liabilities and now the AGR dues.
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