Pricing recovery from second half of this fiscal may propel industry ARPU to pre-Jio levels of ₹156 by end FY22, says Edelweiss report; CRISIL sees 7% revenue growth

The Indian telecom industry, which has been grappling with declining revenues following a long and bitter tariff war triggered by fierce competition in the market, is likely to see signs of recovery in the current financial year (2019-20).

The forecast of green shoots appearing are hinged on expectations that marginal rise in tariffs, combined with higher data usage, will drive upwards the average revenue per user (ARPU) – seen as the only tool to boost the industry revenues, as subscriber growth is anticipated to remain muted.

In a recent report, agencies such as Edelweiss as well as Crisil have forecast that price recovery in the telecom sector could take place from the second half of the current financial year.

The Edelweiss report titled ‘Telecom — Daylight Again’ noted that the entry of Reliance Jio in FY17 had unleashed one of the most brutal price wars in India’s telecom market, and consequently, the industry’s ARPU plunged about 38%, causing the total industry size to shrinkto ₹1.4 trillion from ₹1.8 trillion.

“However, finally, there’s light at the end of the tunnel as we perceive potent catalysts on the horizon,” the report said.

It reasoned that mobile broadband penetration crossing 50% had rendered monetising of existing customer base more lucrative than chasing incremental market share and that the hike in price was imminent.

Asset monetisation

Besides, telecom operators are undertaking a massive non-core asset monetisation drive, which makes it imperative for investors to repose confidence in the telecom industry’s long-term health.

The report expects these factors to trigger pricing recovery in telecom operators from second half of this fiscal, propelling industry ARPU to the pre-RJio level of ₹156 by end FY22, from ₹98 in Q3FY19. Crisil believes that the Indian telecom industry will reverse a two-year declining trend with a 7% revenue growth in fiscal 2020. This growth, it said, will ride on an increase of about 11% in ARPU, even as the overall subscriber base may shrink 4%. “A protracted tariff war has pushed ARPU to a decadal low. In the past two years, the industry has lost 20% of potential revenue, tantamount to over ₹40,000 crore,” it noted.

“The telecom tariffs have hit the bottom of the trough and the industry expects to start seeing a marginal increase in them, mainly because the prime mover in tariffs — Reliance Jio — now has about 30% revenue market share (RMS),” Rajan Mathews, director general at Cellular Operators Association of India (COAI) said. He added that any price-led aggression would hurt all players adversely and Jio may not be keen to continue to dilute its earning stream by reducing tariffs.

Mr. Mathews pointed out that with existing operational capacity it was estimated that an increase of ₹1 in ARPU would lead to a rise of about ₹1,000 crore in terms of profitability for the industry.

The launch of Reliance Jio not only caused price disruption in the market, it also triggered consolidation in the sector, forcing existing players to either match Jio’s offers or exit the market.

As a result, the industry is now left with four players — Vodafone Idea, Bharti Airtel, Reliance Jio, and the state-owned BSNL — which experts believe is the “ideal level of competition”.

“Although the company [Reliance Jio] has 30% RMS and significantly higher EBITDA margin (39% currently) than peers, its RoCE is a meagre 3.3% due to high capital employed. Hence, we believe that after achieving one of its key goals — 400 million subscribers in H2FY20 — RJio will hike prices to improve return ratios,” Edelweiss said.

Talking to The Hindu, Balesh Sharma, CEO of Vodafone Idea, the largest telecom operator in the country, said, “Our outlook for the market is very positive.”

This confidence, he said, came on the back of various factors, the first being the market size of 1.3 billion, which was still under-penetrated with only three private players remaining. “If you look at the market you have billion active SIM cards. However, when you take into account multiple SIMs etc., we believe there are about 700 million unique users. So, about 600 million people haven’t seen their first SIM card yet.And even within the billion SIMs, half are currently not being used for data.”

Coverage, capacity

He pointed out that about 46% of the non-data users or 2G users are currently on the Vodafone Idea network. “So, if I have coverage and capacity, I can retain them when they go from to 2G to 4G, from limited to unlimited data, and therefore grow their ARPUs and my revenues. This is just one set of growth opportunity.”

Mr. Sharma also said the unlimited prepaid bundles are currently priced at below cost. “This is not logical because you have a category where demand is unlimited, but supply is limited because there is only so much spectrum and so much capacity you can create… by any law of economics it means that this is an opportunity to increase prices”. He added that even in terms of market structure, the industry had come down to three private players and a public sector firm which “is the optimum level of competition.

The company is in the middle of raising ₹25,000 crore by way of a rights issue. Rival Bharti Airtel, too, has announced fund raising plans of up to ₹32,000 crore through a combination of rights issue (₹25,000 crore) and bonds.

Both Vodafone and Airtel, have also rolled out minimum recharge plans — at ₹35 valid for 28 days, to weed out non-paying subscribers, which too is helping their respective ARPUs. BSNL too is eyeing a share of the about 500 million population “untouched by mobile phones”. Stressing that the worst part is over for the company and the industry, BSNL CMD Anupam Shrivastava said the PSU was best placed to leverage this opportunity, given the reach of its network.