Rising call tariffs seen ringing in turnaround for local telcos

The telecom sector may be nearing an inflection point again, as more telecom operators test consumer sensitivity by raising call tariffs, which had been beaten down to rock-bottom levels over the last couple of years amidst hyper competition.

On Friday, Bharti Airtel, the country’s largest mobile telephony operator with about 167million subscribers, said it has been forced to raise call rates.

Last month, Tata Docomo had told subscribers that after the first year of subscription, call rates would double from the current 60 paise per minute to 120 paise per minute.

Operators are seeking to raise tariffs as they face higher costs when venturing out of tele-saturated cities to India’s hinterland in search of subscribers. And though the rate hikes are happening in regional pockets now, chances are the tariffs will be raised across the country sooner than later.

The cost of servicing the huge debt taken to acquire very expensive spectrum and licence for offering high speed third generation or 3G services is also adding to the pressure.

“Telecom is probably the only industry where despite increasing inflation, tariffs have been falling unabatedly,” an Airtel spokesperson said. “Continuously declining (profit) margins, high 3G & BWA (wireless broadband) auction prices, constrained spectrum and rural roll out aspirations leave us with little choice but to make some price corrections.”

Airtel did not specify by how much the call rates are being raised or in which circles the higher tariffs would be applicable. Media reports quoting unnamed sources pegged the raise at 20% and that it would be in at least six of India’s 22 telecom circles.

Call rates started nose-diving nearly three years ago, when India allowed the entry of several new operators who in their desperation to get subscribers started offering lower call rates, forcing existing operators to match the new rates. India currently has over 10 operators per circle, compared with 3-4 operators in most developed markets.

Incidentally, Tata Docomo, which is now leading the tariff hike cycle, was the first to trigger price wars by lowering tariffs and offering per-second billing.

Along with call rates, the profitability of cellular telephony firms also came down.

Now, the operators are testing the waters to see if tariff hikes can be pushed through without much backlash from subscribers used to very low call rates.

This, in turn, has Dalal Street excited, though it means the average man on the street will have to shell out more for phone calls.

Marketmen see the higher tariffs improving the profitability in the Rs87,400crore Indian telecom industry.

“Structurally, efforts by a price leader like Tata Docomo to rebalance RPM (rates per minute) indicates improved competitive environment,” Shobit Khare and Nirav Poddar of Motilal Oswal Securities noted in their July sector report. “Every 1% change in revenue per minute impacts Ebitda (operating profits) for Airtel/Idea/Reliance Communications by 1.3-3.2%.”

Airtel shares gained 4% on the Bombay Stock Exchange (BSE) to close the day at Rs410.95, outperforming the broader market, which rose 1.55%. Over 50 lakh Airtel shares were traded on the BSE on Friday, compared with an average 3 lakh shares daily during the last two weeks.