In a big industry move, Bharti Airtel has taken the lead in hiking tariffs for select customer groups. At the end of July 2021, the telco raised the base tariffs for its post-paid corporate users, followed by a tariff hike for its entry-level prepaid customers in August 2021.
Airtel has now discontinued its Rs 199 post-paid plan for new and existing corporate users. The entry-level plan for this segment will now start at Rs 299. For retail customers, the 749 family post-paid plan has been revised upwards to Rs 999, with enhanced data benefits for new users. Meanwhile, the minimum charge of Rs 49 has been discontinued for prepaid users and been replaced by a Rs 79 base pack.
On similar lines, Vodafone Idea (Vi) has upgraded its base plan prices for prepaid and post-paid users in several circles. Jio, however, has so far shown no inclination to walk down the tariff revision path.
Broadly, price upgrades in both the post-paid and the prepaid segments will shore up revenues for the private incumbents, more so for Airtel, with ARPUs going up by 3-4 per cent as per industry estimates. Further, even subscriber migration to competitor Jio will not be substantial. As per India Ratings & Research, Airtel is less likely to face competition from Jio due to the almost similar entry-level plans of the telcos in the prepaid category and the sticky nature of subscribers in the post-paid category. Jio’s entry-level JioPhone plans start at Rs 75, whereas Airtel’s are priced at Rs 79. According to Goldman Sachs, Jio does not have a 2G network and customers would need to purchase a new 4G handset to transition to its network, which may prove to be a significant stumbling block.
The tariff hikes are likely to drive strong growth in Airtel’s revenues over the next three years. The move is also indicative of the fact that the industry is striving to move towards a higher-ARPU regime.
Impact on revenues, ARPUs and competition
Raising tariffs in the post-paid segment seems like a good strategy and, at the same time, a safe bet to improve realisations for private telcos. This is one segment that has remained largely unscathed by Jio’s disruptive tactics. Despite Jio offering a base plan of Rs 199 for post-paid users (an almost 60 per cent discount on Airtel’s entry-level plans) for over two years now, the latter’s post-paid user base has remained intact. In fact, it has seen a marginal increase during this period. The same is true for Vi as well. While the telco saw its overall user base decline by about 34 per cent in the past two years, its post-paid subscriber base has decreased by less than 10 per cent.
Although the post-paid market is much smaller in comparison to the prepaid market, it is extremely lucrative as it comprises high-ARPU customers. For Airtel, post-paid connections constitute 5 per cent of its mobile customer base, but contribute about 20 per cent to its mobile revenues. Similarly, Vi’s post-paid users account for 7 per cent of its mobile customer base, but constitute 25 per cent of its mobile revenues. Thus, a major tariff hike, of as much as 50 per cent, would significantly increase telco ARPUs. In contrast, a minor upward revision in the prepaid segment may go largely unnoticed in company margins or ARPU growth, as it mostly comprises non-data and low-paying subscribers. As per industry estimates, for Airtel, only about 50 million users, mostly 2G/feature phone users, are going to be impacted by the price hike. In a research note, Goldman Sachs has stated that the effective tariff increase will result in 3-6 per cent incremental wireless revenues/EBITDA (calculated on the numbers for the fourth quarter of financial year 2021), or a Rs 5 increase in monthly ARPUs.
Tariff rationalisation is the need of the hour
In a bid to remain competitive, telecom players have progressively undercut each other by slashing tariffs. This price war has crippled the sector’s financial health. It has left Airtel bleeding and driven Vi close to the edge.
Telecom tariffs in India continue to be among the lowest and most unsustainable in the world. Telcos are low on cash and need more revenues and higher profitability to invest in network upgrades as well as 5G roll-outs.
Both Airtel and Vi have, time and again, emphasised the need for sustainable tariffs for better ARPUs. Tariff hikes would mean an improved sector EBITDA margin. However, given Jio’s lack of initiative in this regard, Airtel and Vi were reluctant to make the first move. Even in the current scenario, Airtel has been very cautious and has not revised tariffs for the bulk of its customers.
But this cannot continue for long. Jio, too, has started to feel the heat with its overall revenue growth slowing down. The telco’s year-on-year revenue growth stood at 18 per cent during the quarter ended June 2021, not very impressive for investors. Moreover, Jio has already hit the revenue market share cap of 50 per cent in several circles, limiting further subscriber growth in these areas. Its original strategy of volume-led growth is no longer sustainable. The next phase of growth can only be achieved on the back of healthy margins, which is possible only by raising tariffs.
Airtel’s decision to hike tariffs in select circles may kick-start a bigger trend in the sector. According to industry analysts, there is significant headroom for increasing tariffs in the Indian telecom industry. The consensus among experts is that although the telecom market is price sensitive, the demand for telecom services will not be affected by a 30-40 per cent increase in tariffs, provided all three private telcos implement it collectively.
The government, on its part, is reportedly working on a relief package to improve the sector’s viability. Besides, telcos are seeking options such as an interest-free moratorium on spectrum payments, and a phase-out or reduction of levies such as licence fees and spectrum usage charges. The industry also wants the government to push for a floor price for telecom services. The absence of a floor price has left Airtel and Vi with no option but to embark on a journey of tariff hikes for course correction. As per Goldman Sachs, Airtel is expected to go in for a tariff hike in the prepaid smartphone segment next, most likely in 2021 itself. Prepaid smartphone users contributed 50-80 per cent of the industry’s revenues in 2020-21, and for free cash flow to improve materially, the telcos will have to raise tariffs in this segment. But for that, Jio too will have to come on board.
By Akanksha Mahajan Marwah