Telcos may escalate price war

After consolidation in the sector, Voda-Idea, Airtel and Jio are unlikely to find easy pickings

The country’s top three telecom players continue to face downward pressure on average revenue per user (ARPU) and the trend might continue in the coming months, impacting their profitability as well as share prices, indicate the June quarter results.

The stocks of Bharti Airtel and Idea Cellular have been lagging the key indices such as the BSE Sensex in 2018 — they are down 30-45 per cent versus a rise of over 9 per cent in the Sensex.

In the June quarter, ARPU, the revenue that telecom operators earn from a subscriber, for Airtel, Jio and Vodafone was down between 2 and 9 per cent on a sequential basis; Idea will announce its results on Monday.

After aggressive post-paid plans, Jio launched attractive plans for its pre-paid segment with packs between ~49 and ~153. Currently, about 10 per cent of Jio's feature phone user base is on the ~49 plan. Old operators have responded with lower-priced entrylevel packs. Both Vodafone and Airtel launched a ~47 pre-paid plan recently, while Idea responded with a pre-paid plan of ~75 with added benefits.

The aggression might increase now that the market has consolidated further with the merger of Vodafone and Idea getting the final approval. Moreover, there are no easy pickings now as the smaller players have all exited the market. “Post consolidation (exit of small players and the Vodafone-Idea merger), the Indian telecom industry may see another price war as operators vie for the top position in the subscriber market share,” says Hetal Gandhi, director, CRISIL Research.

The industry’s ARPU, which declined by 25 per cent in 2017-18, is expected to decline a further 6-8 per cent in the current financial year. Gandhi expects a marginal recovery in ARPU in 2020 as data volumes-led growth will begin to offset price drops.

In addition to the pricing competition in the entry-level segment, what could delay the moderation is Jio’s market share ambitions. Analysts led by Gaurav Malhotra of Citi Research believe that with a 400-million subscriber target of Reliance Jio (215 million at the end of the June quarter), revenue growth recovery for the incumbents seems unlikely in the near term. Given the pace of addition for Jio (40 million in the June quarter), it seems the competitive intensity will remain high for four to five quarters at least.

Despite the worries, there are some positives from the recent results. The first is the fall in the pace of revenue decline compared to previous quarters. Vodafone, for example, announced a flattish revenue if the impact of termination charges is excluded from the results, largely due to stable smartphone tariffs.

Analysts at Citi believe that the bulk of the ARPU down-trading on account of a shift to unlimited bundled plans is behind. While the pace of decline in Vodafone’s ARPU on a sequential basis fell from 14 per cent in the December quarter to 3 per cent in the June quarter, the same for Bharti Airtel has been from 15 per cent to 6 per cent (adjusted for lower ARPU Telenor subscribers). Gopal Vittal, MD and CEO, Bharti Airtel (India & South Asia), in an analyst conference call, indicated that the pricing was unsustainable and should start improving over the next six months.

Among the hardest hit by the industry consolidation and price war would be the merged Vodafone-Idea, say analysts. According to Harsh Jagnani, sector head & vice-president - Corporate Ratings, ICRA, a complicated merger like this might result in loss of some subscribers, whom the other telcos might look to acquire.

Moreover, the entity has not been able to match Jio and Airtel on capital expenditure, which, given the sharp rise in traffic, could impact its ability to retain customers.

Further, the merged company’s operating profit is estimated to have shrunk the most, crippling its ability to invest given the sharp rise in net debt to Ebidta levels of about 15 times.

“Vodafone-Idea faces an uphill task of defending its current 36 per cent revenue market share. Expect the relative stability of market share seen over the last five quarters of Jio’s ramp-up (gains from smaller telcos offset by the loss to Jio) to give way to revenue

market share erosion,” say analysts at IIFL Institutional Equities. Most analysts have factored in revenue market share to move to about 25 per cent for India’s largest telco over the next couple of years.