Can Recent Rate Hikes Help India's Telecom Sector Recover?

India’s telecom sector has been facing a bloodbath ever since Reliance Jio arrived on the shore with its dirt-cheap pricing for both data and voice. The aggressive move by Jio forced incumbents like Vodafone and Airtel in a corner and price wars ensued resulting in data costs coming down from Rs 333 per 1 GB of data in 2016 to just Rs 7 per GB of data in 2019. Now, this is set to change.

 

All the three major operators – Reliance Jio, Airtel and Vodafone Idea have announced tariff hikes of up to 40% across their plans in a move to shore up more revenues from prepaid users who constitute about 80% of their user base. Now, the average cost of high-speed data has moved up to Rs 11 per GB from Rs 7 per GB earlier but even this increase is not expected to help the telecom companies much in their quest for survival.

 

There are many reasons why the industry is suffering and one of the biggest hit came from the government’s demand earlier that all telecom operators pay their dues for the spectrum they have been using. This amount runs into lakhs of crores cumulatively and as telecom companies made provisions for these dues, their profitability tanked.

Earlier, the government demanded that these dues be paid by January 2020 which resulted in Vodafone Idea Chairman Kumar Mangalam Birla publicly announcing that India’s third-largest mobile operator might have to shut shop.

“If we are not getting anything, then I think it is the end of the story for Vodafone Idea,” Birla said. “It does not make sense to put good money after bad… We will shut shop.”

Vodafone-Idea is supposed to pay more than Rs 58,000 crore to the government. The condition of the telecom companies is so precarious that both Vodafone Idea and Airtel posted their biggest ever losses in the quarter ended September 2019 to the tune of Rs 50,921 crore and Rs 23,045 crore, respectively.

 

 

Source: Mint

These losses come in the context of falling revenues per user. Due to the pricing wars, the incumbents have had to lower prices in order to retain users from switching to Jio. Even as Jio has quickly garnered new users (both first time and switchers), Airtel and Vodafone Idea have done their best to retain their core base by offering more services for lower prices.

As a result, the average revenue per user, a statistic used to determine how much a company makes on average from its every user has fallen from Rs 126 per month for the sector in 2016 to just Rs 73 in 2019. It is to be noted that even as ARPU has gone down, costs have only increased. The increased number of users has mandated more network infrastructure to be deployed, spectrum costs have risen and telecom companies are even forced to give services such as Netflix subscriptions for free to users in order to retain them.

While the first round of hikes has happened, it is unlikely that these hikes will help. Research reports project that ARPU needs to come up by a lot more for these telecom companies to thrive.

Research firm Jefferies stated in a note earlier this month that the expected rise in ARPU for the three players will be between 18% for Vodafone Idea to 28% for Reliance Jio. The firm added that consumers may not be able to digest a massive increase in tariffs as they rarely top-up data packs to continue watching their favourite shows on streaming services if they run out of data.

 

 

Source: The Economic Times

The more important bit is that just financially, this rise in revenue isn’t enough. For instance, Kotak Institutional Equities said in a report that Vodafone Idea needs its ARPU to rise by 83% in order for the firm to maintain liquidity to meet its requirements in the financial year ending March 2023. This means that the company’s ARPU needs to rise to levels above Rs 200 per person from its current levels of about Rs 107 per month per user.

But there are more things to be considered here. For instance, the government has allowed a moratorium of two years on the pending spectrum payments by telecom companies. But, there are still issues such as interconnect usage charges which companies pay when their customer calls a different network user. The current charges are 6 paise per minute which Vodafone Idea and Airtel want to continue but Jio is lobbying for it to be done away with completely. This will further reduce revenues for the telecom companies and make it tougher for them to recover.

While tariff hikes will help boost cash flows in the short term, the fortunes of telecom companies depend on not only the user behaviour to fatter phone bills but also the regulation and policy space which will seek to determine the way the industry moves in the coming months.

For now, users are happy to enjoy the internet revolution as everything from entertainment to finance has moved online on the back of never-seen-before speed and convenience. Be it obtaining a quick personal loan or investing in mutual funds, online platforms such as Bajaj Markets have emerged as preferred destinations for individuals. Bajaj Markets offers great offers on loans with transparent pricing and faster processing. The platform also offers high quality direct mutual funds which save on commissions and earn you higher returns while allowing you a quick and easy process for investment.

Bajaj Markets, a subsidiary of Bajaj Finserv, is a one-stop digital marketplace that has been created for consumers on the go. It offers 500+ financial and lifestyle products, all at one place. At Bajaj Markets, we understand that every individual is different. And that’s why we have invested in creating a proposition – Offers You Value. A value proposition that ensures you get offers which are tailor-made for you. We also offer an amazing product range and unique set of online offers across Loans, Insurance, Investment, Payments and an exclusive EMI store. Be it in helping you achieve your financial life goals or offering you the latest gadgets, we strive to offer what you are looking for. From simple and fast loan application processes to seamless and hassle-free claim-settlements, from no-cost EMIs to 4 hours of product delivery, we work towards fulfilling all your personal and financial needs. What’s more! Now enjoy the same benefits in just one click with our Bajaj Markets App.