Mukesh Ambani's Reliance Jio tariff pulls down shares of telecom companies

Bharti Airtel fell 6.4 per cent, while Idea Cellular plunged nearly 12 per cent, the most in a decade, on fears that Jio's new plan will erode revenues and margins

Shares of telecom companies fell on Friday, a day after Reliance Jio Infocomm launched a plan targeting post-paid users.

The S&P BSE Telecom index dropped 4.25 per cent, the most in seven months, even as the Sensex rose 0.82 per cent, or 289.52 points, to 35,535.79. Bharti Airtel, the country’s biggest telecom operator, fell 6.4 per cent, while Idea Cellular plunged nearly 12 per cent, the most in a decade, on fears that Jio’s new plan will erode revenues and margins.

Jio on Thursday unveiled an unlimited post-paid plan for Rs 199, with attractive rates for international calls. The latest announcement came as a fresh blow for incumbents, already under pressure from Jio’s low-cost offerings in the pre-paid segment.

“The post-paid segment was not affected as much as the pre-paid segment by Jio’s disruption. This event changes the dynamics dramatically. The post-paid segment accounts for nearly 20 per cent of the industry’s revenues,” according to a note by Kotak.

The big three, Airtel, Vodafone and Idea, would soon respond to Jio’s offer, industry players said. This, in turn, would impact their average revenue per user, which is high in the post-paid segment.

“Any 10 per cent cut in post-paid prices will lead to an EBITDA decline of 12 per cent and 6 per cent for Idea and Airtel, respectively,” said Jefferies in a note.

The number of users in the post-paid segment is just 7 per cent of the total subscriber base, with average revenue per user (ARPU) of around Rs 500. The segment is popular among corporate users. “Most of the corporate post-paid connections are in the range of Rs 399-499 per month. ARPU will correct if incumbents try to hold on to these customers. Also, ISD rates offered by Jio are much lower than the Rs 8-10 per minute charged by incumbents,” the Kotak note added. 

Under the new plan, Jio is offering international calling (ISD) rates of Rs 0.5 to the US and Canada. The Mukesh Ambani-led company is also offering low tariffs on international roaming.

“While outgoing international calls are a very low proportion of the industry’s overall voice volumes at less than 0.1 per cent of outgoing volumes, we believe the contribution to industry revenues could be around 2 per cent, or Rs 20-30 billion in absolute terms. This revenue stream can easily reduce by half,” according to the Kotak note. Shares of telecom companies have fallen sharply this year. Airtel, one of the best-performing Sensex stocks in 2017, is down 27 per cent. Idea has plunged 52 per cent on a year-to-date basis. In comparison, the Sensex has gained 4.3 per cent.

“After the sharp discount offer by Jio, we expect incumbents to respond, and a further decline in ARPU for Bharti and Idea. This is Jio’s first offer aimed at the enterprise market,” the Jefferies note added.