Will tariff hikes boost margins for telecom operators?

Ever since the entry of reliance JIO in 2016, there was a revolution and suddenly there was a flood of free data plans and free calling. Telecom operators have been undercutting each other by slashing call as well as data usage rates. But now the market of free is ending. Every year telecom companies are seen making their plans expensive. so it is expected that soon the pre-paid plans of all the companies may become as expensive as before.

In a statement, Bharti Airtel said the tariff hike would allow it to mark the start of returning to ₹200 ARPU, and that it would “enable the substantial investments required in networks and spectrum”.

Why are telecom operators raising tariffs?

Telecom operators are raising tariff charges to protect their ARPU margins. Airtel, one of India's three prominent private mobile providers, announced a roughly 25% increase in retail prices in November 2021. Following in the footsteps of Airtel, Vodafone Idea and Reliance Jio also announced a similar rate increase, ET reported.

Airtel's basic voice-only plan was raised from Rs. 79 to Rs. 99 as a result of tariff hikes, the increase in most cases is about 20%. Vi’s basic voice-only plan changed similar to Airtel's from Rs. 79 to Rs. 99. Whereas, Jio’s basic voice-only plan hiked from Rs. 75 to Rs. 91. Despite such tariff hikes, Jio has the cheapest basic voice-only plans as compared to Airtel and Vi.

Analysts said that the telecom operators are likely to increase tariffs by another 10–12% further to boost average revenue per user (ARPU).

Despite the price increase, the three carriers, including Vodafone Idea (Vi), are likely to add up to 40 million customers in FY23, primarily in the underpenetrated rural markets, they said.

The industry, including Vi, did not lose active users in the March quarter even after 20-25% tariff hikes in November and December last year. This, analysts said, underlined that the market is ready to take another hike in its stride as telecom tariffs in India remain amongst the lowest globally.

According to Trai data, Jio had the greatest share of the market with 35.28 per cent, Airtel was second (31.37 per cent), and Vodafone Idea was third (23.09 per cent) at the end of February. BSNL and MTNL respectively have 9.98 per cent and 0.28 per cent of the market.

The tariff hike was needed for survival and for growth. Vi was required to do a tariff hike for survival purposes, while Airtel and Jio chose a tariff hike for growth purposes.

Airtel said higher tariffs will help boost its mobile average revenue per user (ARPU), a key yardstick to measure the profitability of mobile telcos, to " ₹200 and ultimately at ₹300 so as to provide a reasonable return on capital that allows for a financially healthy business model."

For Airtel, the tariff hikes resulted in an increase in ARPU from ₹163 to ₹178 in the March quarter. As a result of tariff hikes, the company's consolidated net profit increased to 2,008 crores.

Airtel plans to reach its target of Rs. 300 ARPU in 5 years. It expects the next tariff hike, which is pending this year, to drive the company's APRU to ₹200 mark.

In Q4, ARPU for Reliance Jio and Vodafone Idea stood at ₹168 and ₹124.

AGR Dues

All telecommunications companies must pay the government 3–8 per cent of their adjusted gross revenue (AGR) as a "tax" for accessing the government-owned wave spectrum.

According to media reports, Bharti Airtel and VI are burdened with a supreme court judgement which asks them to pay more than ₹58,250 crore and ₹43,890 crore, respectively, as adjusted gross revenue (AGR) dues. Though both companies have opted for the four-year moratorium on the spectrum and AGR dues, they will have to come up with the funds for the payment once the moratorium ends.

5G Spectrum

The telcos want capital to participate in the 5G spectrum auction. The telecom regulator suggested a basic price decrease that fell short of the operators' proposal for a 95 per cent reduction in the initial base pricing. While telecoms would prefer to charge a premium for 5G, the lack of a compelling end-user use case prevents them from doing so.

Will higher tariffs boost margins?

According to CRISIL, an estimated 20% improvement in the average revenue per user per month (ARPU), rung up by the twin tailwinds of recent tariff hikes and ongoing customer upgrades, could lift the operating profit, or EBITDA, of the Indian telecom sector by 40% over fiscal 2021 to ₹1 lakh crore in fiscal 2023.

Improving profits along with a moratorium on government dues would provide telecom companies (telcos) room to invest an estimated ₹1.5–1.8 lakh crore in 5G services over the current and next fiscals, and improve their return on capital employed (RoCE). The tariff hikes will also support their credit profiles, notwithstanding higher investments, the report said.

"Recent tariff hikes and ongoing customer upgrades could push the sector’s ARPU by 20% to ₹160-165 next fiscal, up from ₹135 in the last fiscal. ARPU growth will lead to non-linear growth in profitability due to the high operating leverage of the telecom sector. The sector’s Ebitda is seen surging by 40% to ₹1 lakh crore next fiscal from ₹72,000 crore in fiscal 2021. Yet RoCE will be moderate at 7-8% because of high capital intensity and adjusted gross revenue dues, "said Nitesh Jain, Director, CRISIL Ratings.