Telcos In Tariff War! Airtel, Jio Hikes Tariff On Prepaid, Postpaid Plans; Will Vodafone Idea Follow Suit?

In a bold move, Reliance Jio takes lead by hiking prepaid and postpaid recharge plans by 12-25% which will come into effect from July 3. Irrespective of the quantum of hike in recharge plans, the key is that Jio is taking the lead, indicating the shift in focus. Tailing behind, Bharti Airtel has also increased its tariff by 11-12% on June 28. As per Kotak Institutional Equities, the focus is towards improving returns on investments which is a key sentimental positive

Jio's latest hike comes after a dry period of nearly 2 and half years. Jio has not hiked its tariffs since December 2021.

As per Kotak, in the last two rounds of tariff hikes, Vi (Dec 2019) and Bharti (Dec 2021) took the lead, while R-Jio was the last one to raise tariffs. Unlike, Bharti and Vi, who have been very vocal about the need for industry tariff repair, R-Jio has not been upfront about the need for industry-wide tariff hikes.

Now, Jio has increased tariffs by ~17-25% on popular prepaid plans and by ~17% (or Rs50/month) on entry-level postpaid plans. On the other hand, Jio kept the tariffs for Jiophone and JioBharat phone users unchanged. This is expected to come into effect from July 3, 2024, and the complete flow-through of the hike is likely from December 2024.

The blend of tariff hikes is in line with Kotak's estimates.

However, Kotak noted that earlier, the need for R-Jio to raise tariffs was equally (if not more) pressing, given: 1) its larger 5G investments; and 2) further moderation in RoCEs and FCF. While the quantum and timing of tariff hikes is in line with its estimates. Hence, Kotak believes that R-Jio taking the lead on raising tariffs is a sentimental positive for the telecom industry.

Not just tariff hikes in prepaid and postpaid plans, Jio has also restricted unlimited 5G data allowance to 2GB/day and above plans versus Rs239 (1.5GB/d-28 days) and above plans earlier. Kotak believes that this move could potentially lead to up-trading to the 2GB/day plan by higher data-consuming users and provide some monetization on 5G.

Right after Jio, telecom giant Bharti Airtel has announced a tariff hike as well. In the early hours of June 28, Bharti Airtel maintained that the mobile Average Revenue per User (ARPU) needs to be upwards of INR 300, to enable a financially healthy business model for Telcos in
India. It added, "We believe that this level of ARPU will enable the substantial investments required in network technology and spectrum and offer a modest return on capital."

Accordingly, Airtel said, it will revise its mobile tariffs as indicated below, from July 3rd, 2024. Airtel said, "We have ensured that there is a very modest price increase (less than 70p per day) on the entry level plans, in order to eliminate any burden on budget challenged consumers."

Just as Kotak predicted that Airtel would follow suit, it has come to pass. The brokerage believes Vodafone Idea will do the same. However, it depends upon the quantum of tariff hike.

If Airtel and Vodafone Idea were to follow suit and carry similar hikes like RJio, then Kotak believes that overall customer outgo on telecom services (inclusive of tax) could increase by ~Rs475 bn annually (assuming not much down-trading/subscriber churn).

Data from the brokerage showed that telecom spending as % of GDP would only inch up to 0.88% (from ~0.8%), but still significantly below ~1.4% of GDP before the R-Jio launch.

Due to tariff hikes, incremental revenue and EBITDA for the three private operators could inch up by ~Rs400 bn (18%) and ~Rs300 bn (~25%), respectively. Kotak added, " Our earnings and FV remain unchanged for now, as we await the extent of tariff hikes from Bharti and Vi."

After Jio's hike, share prices of Vodafone Idea and Airtel are trading on a bearish note.

Bharti Airtel share price is down by 1% to Rs 1,456.60 apiece, which is near its intraday lows of Rs 1,451.30 apiece. Further, Vodafone Idea has slipped by 1.40% to Rs 18.26 apiece, after touching an intraday low of Rs 17.90 apiece.

This comes after Airtel touched a new all-time high of Rs 1539.10 apiece in the early trade. While Vodafone Idea also hit new high of Rs 19.15 apiece.