Vodafone Idea, Airtel to hike tariffs from Dec 1; mobile calls, data to cost more

Airtel & Vodafone Idea have announced tariff hikes from 1st December after they posted historic losses on account of AGR dues.
 
This is the first price hike in more than three years that could help shore up revenue and operating income for the two loss making telecom companies but also trigger some subscribers to switch to rival telecom operator
Reliance Jio Infocomm. 
 
Vodafone Idea and Airtel mentioned the financial stress in the sector, the current low tariffs and the need to invest in networks to keep up with surging data demand as the reasons for the move. The companies have been repeatedly harping that higher prices and lower government levies were crucial to improve the health of the sector weighed down by huge debt and intense competition. 
 
While the companies did not reveal the quantum of the hikes, some analysts shared that it could be as much as 30-45% in the near term and up to three times the current rates over the next two years. 
 
The entry of Jio with its low tariffs had shaken the Indian Telecom market and triggered a price war. Jio recently started charging 6 paise a minute for calls made to any rival network and removed some low-priced plans to improve its operating performance. To catch up with this increase in tariffs taken by Reliance Jio, incumbents could raise tariffs by about 10-11%.
 
Airtel said in a news release “We understand that TRAI (Telecom Regulatory Authority of India) is likely to initiate a consultation for bringing rationality in pricing in the Indian mobile sector, which has been operating at prices that have been eroding the viability of the sector”.
 
The telecom sector is highly capital-intensive with fast changing technology cycles that require continuing investments, and hence it is important for the industry to be viable, it said. “Accordingly, Airtel will appropriately increase price offerings in the month beginning December.” 
 
Vodafone Idea, which was the first to announce the proposed price hike, said that the government had recognised the stress in the sector, bogged down by debt of more than Rs 7 lakh crore and striken by the price wars since Jio’s entry. 
 
It added “Mobile data charges in India are by far the cheapest in the world even as the demand for mobile data services continues to grow rapidly … To ensure that its customers continue to enjoy world class digital experiences, Vodafone Idea will suitably increase the prices of its tariffs effective 1 December 2019”.
 
Shares of Vodafone Idea, with 311.1 million subscribers, closed at Rs 4.47, up 21.47% on the BSE, while Airtel, with 280 million customers, ended 4.1% higher at Rs 409.15. The announcements came after market hours. 
 
IIFL Securities vice-president Sanjiv Bhasin said “Now is the time for tariff increase and I expect an upside of 30-45% in the immediate term … I don't rule out an upside of 200% on data and voice tariffs over the next 1-2 years”.
 
Nitin Soni, the director (corporates) at global ratings firm Fitch, said the revenue of Vodafone Idea and Airtel could go up by as much as $500 million (Rs 3,500-3,600 crore) by the fiscal fourth quarter if they increase tariffs by an average 10% and manage to retain their customers. 
 
He said Vodafone Idea’s Ebitda would double by the fourth quarter in such a scenario. The telco reported revenue of Rs 10,440 crore and operating income of Rs 3,347.1 crore for the June-September quarter. It had net debt of Rs 1.02 lakh crore. 
 
At Airtel, Soni expects Ebitda from India mobile services to expand by around $150-200 million by the fourth quarter. The company reported India mobile services revenue of Rs10,981.4 crore and Ebitda of Rs 3,991.3 crore in Q2 ended on September 30. 
 
He, however, expects the degree of an Airtel tariff hike to be a tad lower than Vodafone Idea's, since the Sunil Mittal-led telco has a significantly higher average revenue per user at Rs128, compared with Vodafone Idea’s Rs107 and Jio’s Rs120. However he warned that the planned tariff hikes by both telcos could lead to some subscriber churn to Jio. 
 
Analysts expect the industry revenue to increase by as much as 10-15%, or roughly $1.5-2 billion due to price hikes in the next one year. 
 
While the two telcos had been making huge losses for a while and claiming that the rates were unsustainable, the hike appears to have been sparked off after the Supreme Court order, which backed the government’s stance of including non-core items in adjusted gross revenue. This ruling left the two facing over Rs 80,000 crore in dues, and forced them to make provisions for the payments. After this, Vodafone Idea posted a loss of Rs 50,921.9 crore and Airtel, Rs23,045 crore, for the latest July–September quarter, with both raising serious doubts about continuing as going concerns in the absence of government relief. 
 
Meanwhile the government has set up a panel, which is likely to suggest some relief measures for the telecom sector. But the two companies have clearly said that the only way to restore health of this sector would be tariff hikes. 
 
Rajiv Sharma, head of research at SBICap Securities stated that "Vodafone Idea can do something like Jio, increase voice tariffs by 6 paise or so without connecting it to IUC (interconnection usage charge). It could reprice all of them, changing headline tariffs without getting into voice and data. Or, just a voice charging in all plans," 
 
“For Voda Idea, the increase will be across the board. In smaller package the time duration could be reduced, and above Rs 500, people don't really look at the benefits,” he said.
 
The moot question is what market leader Jio’s reaction to this price hike move will be. Jio has been calling the shots on tariffs since long before it became the market leader. Airtel and Vodafone had been meekly following suit. 
 
The possibility that there might be more to this story than meets the eye cannot be entirely negated. If Airtel and Vodafone Idea are so keen to raise tariffs and improve profitability, why wait until December? They perhaps want greater clarity from the telecom regulator about the extension of the interconnection usage charges (IUC) regime. If there is a formal communication that IUC will be retained, it will give them greater confidence about effecting tariff hikes. IUC was scheduled to be scrapped from 1 January 2020 but TRAI said in October that it will review the decision. 
 
After TRAI unveiled its consultation paper on reviewing IUC, Reliance Jio raised tariffs to offset the IUC outgo involved with outgoing calls to rival networks but categorically said that these new charges will remain as long as the IUC regime is in place. Meanwhile, Airtel and Vodafone Idea, maintained status quo on tariffs.  It is possible that their December tariff hike may well be linked to the final decision on IUC by TRAI. The quantum of hike may also depend  on the  government’s long-anticipated relief package for the industry.

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