Recovery hopes of telecom investors pushed to FY20

New packages from Jio indicate the pricing war is set to continue at least in FY19

Investors banking on a recovery in the telecom sector in FY19 will have to wait a bit longer given that the intensity of pricing war just got worse. After introducing attractive post-paid plans to get premium customers from incumbents, Reliance Jio (Jio) launched new plans to maintain its competitive lead. Jio recently doubled its data offerings to 3 gigabytes (GB) per day on plans ranging from ~149 to ~449. This is in response to Bharti Airtel’s offer increasing its data offerings by 70 per cent for ~399 pack and doubling data allowance for ~199 pack for select customers. With lower tariffs, Jio has kept to its strategy of being the most affordable operator, and analysts expect it to respond every time incumbents lower tariffs, thus keeping a pricing differential.

The new packs come soon after Jio offered a 50 per cent cut in tariff for post-paid connections, below prices of incumbents. The move effectively caps prices incumbents could charge their high-margin customers, and thus, denting their profitability. Analysts, hence have cut profit estimates for Airtel and Idea for FY19 and FY20. SBICAP Securities now expects a recovery in average revenue per user (ARPU) only in FY20. “We do not see any significant decrease in competitive intensity in the near-term as Jio remains focused on market share gains, and incumbents continue to struggle with weak cash flow generation and stretched balancesheets.”

Jio’s strategy of grabbing market share is working. At the end of

March quarter, Jio's adjusted gross revenue share was 25.6 per cent, just behind Airtel-Tata Tele’s 30.2 per cent and Idea-Vodafone’s 37.5 per cent. Both Airtel and IdeaVodafone combine have lost over 1,000 basis points in market share each over the last four quarters. While smaller telcos have been big losers, given Jio’s offerings, more market share loss for incumbents cannot be ruled out. Jio is targeting 50 per cent revenue market share by FY21.

What is compounding matters is industry’s shrinking size, with March quarter revenues down 18 per cent year-on-year and 11 per cent sequentially. At ~243 billion, quarterly industry revenues are at their lowest since 2011. While Idea (given its low ARPU base) remains most vulnerable to market share loss, its merger with Vodafone will be the key trigger. For Airtel, its response to Jio’s new tariffs will set the tone for the pricing scenario in the sector.