Reliance Jio, the country’s largest telecom operator by market share, could follow peer Bharti Airtel if the latter decides to lead the next cycle of headline tariff hikes in the coming year, according to analysts. In the absence of tariff hikes, Jio’s return on capital employed (RoCE) is expected to come under pressure because of the 5G rollout expenses, increase in costs to acquire customers, and higher depreciation and interest on recently acquired spectrum.
To maintain or increase its return ratios, the company is not expected to shy away from tariff hikes, the analysts said. RoCE is a key metric to determine how much profit a firm generates from the capital deployed. The sectoral review by analysts assumes significance as Airtel has been vocal about taking a lead in the next leg of tariff hikes. Vodafone Idea has also been pressing the need for a hike.
The only concern for Bharti Airtel is what if the competition, especially Jio, does not follow suit.“We will keep seeing what opportunities are there to raise it (tariffs). And at some stage, if there has to be some move, we will make it. If competitors do not follow, we will reverse it,” Bharti Airtel CEO and managing director Gopal Vittal had recently told FE.
Analysts, however, said the case for a tariff hike reversal may not arise as the industry needs tariff hikes amid higher network rollout expenses, muted subscriber additions and the absence of 5G monetisation. “We believe there is a case for sharper tariff hikes in the medium term, given a drag on Reliance Jio’s return ratios from potentially higher depreciation and interest on recently acquired spectrum,” Kotak Institutional Equities said in a note.
Kotak’s estimates suggest that Jio’s RoCE has fallen to 8.4% in the fiscal ended March 2023, compared with 9% in FY21. In comparison, Airtel’s RoCE has risen to 7.6% in FY23, compared with 2.6% in FY21, owing to mobile tariff hikes, including the recent increase in entry-level tariffs by the company.“With 37% of assets (including spectrum) under development, Jio’s annual depreciation and interest could potentially rise to Rs 8,500 crore- 9,000 crore each over the next few years and could lead to further RoCE/RoE (return on equity) dilution, in the absence of tariff hikes,” Kotal Institutional Equities said.
The telecom companies had hiked the tariffs across some prepaid plans by 20-25% in November last year. “India still has huge headroom for tariff hikes. Indian telecom players can increase tariffs by 1.5x over the next 4-5 years provided reasonable competitive intensity and as minimum data requirement grows. Yet, India will retain being the most affordable telecom services tariff market,” ICICI Securities said in a note.
The analysis by ICICI Securities showed that the tariffs for popular plans have risen over 2x since July 2017 and despite that, there has been an increase in data subscribers and growth in data consumption. For example, Jio’s first paid recharge plan at Rs 303 for 84 days (base plans with 1GB/1.5GB data per day for 84 days) in July 2017 has increased to Rs 666. Bharti has recently increased its minimum recharge plan to Rs 159 (from Rs 99).“The analysis suggests India’s consumers still enjoy maximum ‘consumer surplus’ relative to comparable economies despite large tariff increases in the past few years,” ICICI Securities said.
In terms of absolute tariff, India’s tariff is the lowest at $2 per month, while Brazil stands at $6.1. Other comparable economies such as Bangladesh stand at $2.9 and Indonesia at $5.8.“Next headline tariffs are expected after elections now. We can see a 15-20% increase in tariffs,” a Mumbai-based analyst said, adding that tariff hikes are important for a meaningful jump in the average revenue per user (ARPU) for telcos. Currently, Airtel has industry-leading Arpu of Rs 203, compared with Jio’s Rs176 and Vodafone Idea’s at Rs 142 as of September end. “I think an organic increase in the Arpu will not get us at Rs 300, we will need a couple of rounds of tariff increases over the next few years. This is not up to us, it’s a competitive market,” Vittal had said. For FY24, both Airtel and Jio are expected to incur a capital expenditure (capex) of about Rs 90,000 crore owing to the rollout of the 5G network, according to analyst estimates.
(Except for the headline, this story has not been edited by The Kashmir Monitor staff and is published from a syndicated feed.)