When telecom operators hiked tariff by as much as a fifth starting July, talk was these were early signs of pricing power returning after a wretched, prolonged rut.
But the hikes didn’t lead to any material change in the average revenue per user (Arpu) of the majors. And they may have actually caused more harm than good at the operating margin levels because subscriber additions tapered, said Ankita Somani, analyst with Angel Broking.
While leader Bharti Airtel has been steadily losing on that count, rivals such as Vodafone and Idea have barely been able to maintain their growth rates.
“Of course, some rub-off of the tariff hikes flows through the second and third quarters, but after that Arpus will be completely flat, with total minutes of usage set to grow just 12% for the current fiscal and 5% in the next compared with 30% in the previous years,” Somani said.
Reena Bhasin and Emmet Kelly, analysts with BofA Merrill Lynch, said the good news for investors in India’s telecom story is that there is still room for penetration-led growth.
Also, regulatory risks relating to spectrum re-farming and roaming abolition seem unlikely to materialise over the next 6-12 months.
“The bad news is that competitive intensity of the market remains high (including among top 3), and increased voice tariffs may not gain traction,” Bhasin & Kelly said in a note after meeting with Vodafone investor event in late November.
Free minutes and special offers by Reliance Communications did lead to a spike in its subscriber numbers, but the additions are now returning to haunt its margins.
“RCom’s lower margins are due to several factors like its free minutes on the network, which cannot be easily done away with, constant tariff hikes, as well as a no-tenancy policy for its mobile towers,” said Somani.
For telcos, it’s reversion to rut as tariff hikes ricochet
“Basically, the company has good broadband offerings, but its voice services need to improve,” Somani said.
The static remains heavy for the Anil Ambani Group firm.
Sachin Salgaonkar, Piyush Mubayi and Paras Mehta, analysts with Goldman Sachs, point out that RCom’s recently launched on-net tariff plan, weaker than expected 3G uptake, higher churn compared with other operators is leading to lower valuation for the telco compared wth peers.
The fact that it was a late GSM mover, will mean it cannot benefit from tariff hikes like other operators, they said in a note on Wednesday.
Sageraj Bariya, managing partner with Equitorials, a Mumbai-based corporate advisory and equity research firm, says the situation is prime for consolidation, just as the New Telecom Policy paves the path.
“Due to market saturation, the only way for operators to increase Arpus is to consolidate. This will improve industry margins,” he said.
To boot, number portability, on which a lot of hope rode, has led to only a 3% subscriber churn, according to data from the Telecom Regulatory Authority of India. As of December 8, total wireless subscribers in India was 881.4 million, while porting requests till October was 231.66 lakh.
In the face of all this, operators will have to change their strategy, said Rajat Rajgharia, head of research at Motilal Oswal, the brokerage.
“Today it is all about size and scale, and while the top 4-5 players dominate the market, it is very difficult for a new player to gain scale now. As competition eases, the focus of operators is more on return on capital than increasing subscriber market share. Therefore, a renewed focus on existing subscribers is the way forward,” he said.
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