With Reliance Jio's bull run, stability in telecom pricing to take longer

Hopes that telecom tariffs will stabilise from the fourth quarter may not fructify because Mukesh Ambani-led Reliance Jio Infocomm, a subsidiary of Reliance Industries, indicated during the announcement of the third-quarter results that the company will not tinker with tariffs as that might stall the growth momentum.
 
While this may apply over the short to medium term, analysts say Jio's rising network costs will force the operator to raise tariffs over the long term. While Jio’s data usage came at a slight dip in Q3 at 10.8 GB a month against 11 GB a month in the second quarter, its data volumes on the network incre­ased 12 per cent quarter-on-quarter and 100 per cent year-on-year, driven by video consumption. Data consumption on JioPhone is 8-9 GB a month.
 
Analysts estimate with incumbent telcos seeking to raise prices, it is up to Jio to take the lead. At the end of the September quarter, Jio's revenue market share (RMS) had expanded to 26.1 per cent while that of Bharti Airtel and Vodafone Idea had come down to 30.9 per cent and 32.8 per cent, respectively. “For incumbent telcos, this (Jio's focus on subscriber addition) could mean revenues staying stagnant until Jio reaches its earlier stated target of (more than 400 million users),” wrote Manish Adu­kia, Gold­man Sachs, in a rep­ort. Goldman Sachs expects Jio to have 302 million subscribers by the end of the financial year.
 
Over the past quarter, Vodafone Idea and Bharti Airtel raised minimum tariffs and introduced bundled plans. The telecom sector in India witnessed the first tariff change in the pre-paid unlimited bundle segment after January 2018 in December when Vodafone Idea and Bharti Airtel made changes to their flagship Rs 399 plan while increasing prices of the 28-day validity plan.
 
Despite rapid subscriber additions, Jio’s subscriber base is stronger in non-metro markets, which comprise low-value customers. That’s unlike the former Vodafone and Airtel base, which includes a large metro presence.

 
However, the incumbents are seeking to tap the rural market with their low-priced data plans and 4G network. Reliance Jio topped with 8.5 million active subscriber addition in October (according to the latest data from the Telecom Regulatory Authority of India), while Bharti Airtel added 3.4 million subscribers, bucking the previous three months' downtrend. Vodafone Idea lost 2.9 million subscribers in the same month.
 

“Taking the outside-in approach forward and based on more customers opting for bundled packs, we have recently launched a portfolio of Active/All-Rounder Prod­ucts with 5 price points having Talktime+Data+Tariff prebundled into one,” said a Vodafone Idea spokesperson.
 
During the quarter, Jio’s net access charges declined by 4 per cent quarter-on-quarter to Rs 1,000 crore despite 12 per cent quarter-on-quarter gro­wth in voice traffic, implying an improving mix of on-net and incoming traffic. Access charges may weigh on Airtel’s and Vodafone’s revenue in the third quarter, analysts expect.
 
Further, as noted by Navin Killa, research analyst, UBS, with domestic interconnect charges becoming zero from the start of 2020, net access charges for Jio (9.7 per cent of sales in the third quarter) are set to decline materially and provide an upside to margins. Credit Suisse analyst Sunil Tirumalai noted the “company (RIL) intends to hive off tower and fibre assets and get outside investors in so as to reduce overall debt levels. We believe this effectively punctures hopes of tariff increases for other telcos (as was argued by some bulls).”
 
The rising network costs to increase 4G coverage are a likely concern for Jio as evident from its rising network opex.
 
Jio's third-quarter EBITDA (earnings before interest, taxation, depreciation and amortisation) margin stood at 39 per cent and incremental EBITDA margin was 42 per cent despite strong revenue growth, due to almost an 83 per cent jump in network operating cost from Rs 1,737 crore in the third quarter 2017-18 to Rs 3,190 crore expenses (30.7 per cent of sales) in the third quarter 2018-19.