RJio hike: Near-term relief for incumbents

While move is positive for sector, it doesn’ t indicate pricing power, as tariffs are attractive at current rates

Reliance Jio’s (RJio’s) revision of tariffs, which includes a reduction in the validity period, is a positive for the telecom sector and will ease some pressure off the incumbents. The company has reduced the validity period of its ~399 plan, considered its flagship, to 70 days from the earlier 84 days and introduced a new plan in its stead at ~459, with similar benefits.

The new plan is 15 per cent more expensive than the previous one. This is the second (upward) revision for RJio tariffs after it became a paid service from April 1. The previous revision saw the company’s effective average revenue per user (Arpu) increase by 35 per cent to about ~121. This was over 20 per cent lower than June quarter Arpu of ~134 for Idea and ~158 for Bharti Airtel. The latest hike bridges the gap a bit between RJio and the incumbents.

Analysts say the price revision is a positive trend in the sector, helping ease the pressure but might not constitute pricing power. Further, an analyst at a foreign brokerage says given RJio’s strengths in spectrum, technology, network and product offering, it would leave enough room for the company to effect more hikes. Ambit’s Vivekanand Subbaraman, in a note prior to the recent hike, says investor optimism on RJio’s “Arpu focus” is misplaced, as the company has been exceptionally successful in the data market with its strategy of undercutting; it has an 85 per cent share of 4G LTE handset consumers as its robust data offering (1GB/day and unlimited voice) is effectively priced at ~110-120 (lower than incumbents).

The company has other levers. The cut in interconnect usage charge from 14 paise per minute to 6 paise a minute from October 1 gives it the flexibility to aggressively expand its market if it chooses to do so. If the company maintains or hikes rates (by reducing validity), it would be positive for RJio’s financials at the revenue and operating profit levels. The company, which posted revenue of ~6,174 crore at an Arpu of ~156 for the quarter ended September, should get a major boost on the top line from both the current hike and from customers moving to higher-priced packs from existing plans.

While the new plans are a positive for the sector and incumbents, the near-term worry would be the promotional tariffs for its 4G feature phones. Attractive initial tariffs for the phone will increase competitive intensity for incumbents and will be a major risk as the lower end tariff segment accounts for half of their incumbent revenues.