Reliance Jio, which disrupted the telecom market ever since its commercial launch in 2016, has decided to follow rivals Bharti Airtel and Vodafone Idea in raising mobile phone tariffs. Having kicked off a no holds barred tariff war three years ago, the Mukesh Ambani-owned firm is now stepping back.
According to sources in the know, the tariff hike decision by the telcos is in response to the government wanting the industry to stop the long-drawn price war and set their house in order. In the absence of a tariff hike, Telecom Regulatory Authority of India (Trai) may have been forced to impose a floor price for the operators. Also, the government has been of the view that any relief measure for the telecom industry should be given only after telcos get out of the price war, that has left the incumbent operators with record losses and high debt, the sources said.
On Tuesday evening, Jio announced it would take measures including “appropriate increase in tariffs’’ in the next few weeks. The move, industry watchers believe, may bring down the pitch of the bitter battle between the incumbents and a new player. Jio’s announcement comes a day after Airtel and Vodafone Idea said they were hiking tariffs from December 1.
In its statement, Jio has asked the government to mandate a ‘2G mukt’ India in the shortest time if the objectives of Digital India mission has have to be achieved. The Jio demand for a 2G-free country is significant as it’s the only operator offering just 4G services pan-India. Bharti Airtel and Vodafone Idea still have a bulk of their customers using 2G.
In anticipation of the tariff hike (the announcement came after market hours), Reliance Industries’ market cap crossed the Rs 9.5-trillion mark on Tuesday.
It’s the first Indian company to reach the milestone, with its stock price rising 3.59 per cent, closing at Rs 1,511.55 on the NSE. Shares of rival firms Bharti Airtel and Vodafone Idea also rallied by 8.66 per cent and 38.2 per cent, respectively.
After the Supreme Court judgment, asking telcos to pay dues related to adjusted gross revenue (AGR) that could amount to more than Rs 1.33 trillion, the incumbents sought a moratorium on deferred spectrum payments and a cut in spectrum user charges among other relief measures.
Chairman Mukesh Ambani had earlier assured the Jio customers that the company’s tariffs would always effectively be 20 per cent cheaper than their competitors. Now, even with competitors raising the tariff, Jio plans to maintain the price gap.
However, according to SBI Caps analysis, with Jio’s tariff plan now including the interconnect usage charges (IUC) minutes, the premium between the like-for-like tariff plans with competitors has already reduced to 4 to 11 per cent, giving the incumbents room to increase tariffs. Jio, however, has made a commitment that the additional charge will be withdrawn once the Trai ends the IUC regime.
In any case, the tariff hike may not significantly impact customers, as they would pay much less then what they did before the Jio onslaught began in September 2016.
Currently, the average revenue per user (ARPU) per month is pegged at Rs 107 for Vodafone Idea, while it’s Rs 128 for Airtel. Jio’s ARPU stands at Rs 120. The tariff war is evident from the change in ARPU in the case of the long-time industry leader Bharti Airtel—in June 2016, the company’s Arpu was Rs 198, and now it’s down to Rs 128.
Even late last year, the finance ministry had sent feelers to the telcos to make rational hikes in tariffs in order to get out of the financial mess instead of just asking the government for relief measures. However, the price war continued unabated.
Analysts are expecting an average increase in tariffs ranging from 10 to 20 per cent. According to SBI Caps, a 15 per cent hike in tariffs will only partially address the cash burn for Vodafone Idea and help meet the AGR dues of Bharti Airtel. It estimates that for Vodafone Idea, such an increase will improve the cash flow by Rs 5,400 crore, which will partly meet its cash burn of Rs 24,100 crore in FY20. That excludes the AGR payout dues. In the case of Bharti, a tariff hike in that range will improve its cash flows by Rs 5,800 crore and help it partially meet the AGR dues.