Telecom tides rise: Price hikes to boost capital returns

With telecom operators raising prices by 10-25% across prepaid and postpaid plans, analysts project a net impact of USD 5.5 B within a year.

In the last week of June, following the government’s latest round of 5G spectrum auctions, which fetched the government’s coffers just over USD 1.3 billion, each of the three telecom operators—Bharti Airtel, Reliance Jio, and Vodafone Idea—raised their respective tariffs across all prepaid and postpaid services for consumers.

The tariff hikes triggered by the three ranges between 10% and 25%, a fairly substantial amount. Even as consumers expressed displeasure, the three companies argued that raising the tariffs was key to increasing the average revenue per user and, in turn, ramping  up profitability.

Before proceeding further, it is important to understand why telcos have repeatedly stated that a new tariff is important for their financial health. India’s telecom operators have long complained about a highly predatory market that made the country one of the least expensive geographies in terms of the overall cost of data.

The formal launch of Reliance Jio in 2016 mostly changed how telecom plans were priced, removing charges and limits on outgoing voice calls and drastically lowering the cost of mobile data.
This led to a boom in the user base of India’s telecom operators, coupled with consolidation of telecom operators. Data published monthly by the Telecom Regulatory Authority of India (TRAI) indicates that India had 1.01 billion mobile network connections as of the end of 2015, before the advent of Reliance Jio.

The tariff hike could generate USD 5.46 billion in incremental revenue over the next 12 months as users’ annual data plans start expiring.

Bharti Airtel had the biggest market share in a market with 12 recognised telecom service providers (TSPs), with over 243 million users. Vodafone India and Idea Cellular were the next biggest TSPs, with 193 million and 172 million users, respectively.

In comparison, TRAI’s latest data from April 30 this year indicates that 91.3% of India’s telecom subscriber base is now under Reliance Jio, Bharti Airtel, and Vodafone Idea, a joint entity formed following the merger of Vodafone India and Idea Cellular in August 2018.

Overall, the market has grown 15.8% to 1.17 billion users. Jio has 472 million users, followed by Airtel’s 387 million and Vodafone-Idea’s joint base of 219 million users. To be sure, eight and a half years ago, Vodafone India and Idea Cellular jointly had 365 million users. Therefore, they lost 40% of their customers due to a lack of extensive network coverage, which both Airtel and Jio presently have.

Mandating Infrastructure Upheaval

This dynamic led the telcos to claim that a pricing hike was inevitable. The key metric here is returns on capital employed (ROCE), which can only increase when telcos make key investments to upgrade their networks.

An analyst note published by Mumbai-based brokerage Axis Capital explained this, saying that the tariff hike could generate USD 5.46 billion in incremental revenue over the next 12 months as users’ data plans start expiring. More importantly, industry sources and media reports pegged the ROCE average of Bharti Airtel and Reliance Jio at just 9.5%, which the hiked tariff could help somewhat improve.

Telcos may see value generation in the short run, but the trade-off could see a not-so-negligible margin of users giving up additional connections.

Data from the FY24 earnings sheets show that Airtel and Jio have cumulatively made capital expenditures in upgrading telecom infrastructure for 5G, expanded coverage areas, and invested in procuring network spectrum from the Centre. The two telcos have also invested in setting up the Industrial Internet of Things (IIoT)-based business avenues, Airtel Business and Jio Business. These expenses are to the tune of USD 18 billion, thereby leading telcos to seek various avenues to make up for all the money that has been invested.

Why would it not affect in the short run?

For each telecom operator, the key for consumers lies in long-term plans. For instance, many prepaid users purchase plans with 12 months validity, which means that once the new tariffs take effect starting in early July, many users may not need to subscribe to a new 
plan immediately.

Users may start rationalising telecom costs by the amount of data they consume, which may also negate the impact of tariff hikes.

Analysts state that this could also lead to users giving up additional SIM cards in order to rationalise the cost of communications within a household. “There will clearly be some consolidation once the tariff hikes come into effect starting in July. As a result, the impact on ROCE and profit before interest, lease, depreciation and taxes (PBILDT) will not see an immediate effect,” said a senior telecom analyst working with multiple telcos at a leading consultancy firm.

The analyst, requesting anonymity since his firm works with both Reliance Jio and Bharti Airtel, further added: “The incremental value generation will undoubtedly happen, but the trade-off could see a not-so-negligible margin of users give up additional connections. Eventually, it remains to see if the tariffs make any sizeable difference.”
Others have also questioned if the desired impact on margins would have the kind of impact on investment returns directly. A senior executive at one of India’s top IT services firms said that ROCE for telecom operators would depend on a myriad of factors. 

“Take captive 5G networks, for instance. In this particular space, it is difficult for any entity to force-generate business value. 5G monetisation has been a challenge for any networking and telecom services firm around the world and remains the same in India. The key reason for this is that the standard of 5G networks is not as big a jump for the average user as 4G from 3G was,” the executive said.

The executive further underlined that one key factor that is contributing to the sustained growth of all telcos is industrial network deployment. “This side of the business offers telcos good margins and also leaves IT firms with a healthy telecom business for managed services. The consumer end of the business, however, remains highly tricky,” the person said.

Care Ratings, a market analysis firm, projected an expected uptick of up to 22% in PBILDT in FY25 itself. Users have countered that price hikes should have ideally been more gradual and not led to an immediate jump of up to 25%, which was seen across all three operators last month.

Postpaid users, too, are expected to lower the tier of service that they subscribe to potentially. The two experts, citing this, added further that with the proliferation and easy access to Wi-Fi services, a downgraded postpaid plan might no longer impact users the way it once would have.

“Our data is freely and widely accessible, and even with the price hike, it does not get exorbitant. However, users may start rationalising telecom costs by the amount of data that they consume, which may also negate the impact of tariff hikes,” one of the two analysts added. 

By Vernika Awal

feedbackvnd@cybermedia.co.in