Telecom Operators Brace For Moderate Tariff Hike Post-Election Season

The telecom industry rate hike of roughly 20-25%, which is projected to occur following the parliamentary elections, may not result in customer loss for providers such as Bharti Airtel and Jio, as the possibility of substantial SIM card consolidation is ruled out.

Bharti Airtel opened at Rs 1318.95, peaked at Rs 1321.05, and fell to Rs 1295 before closing at Rs 1323.85. The market capitalisation was Rs 740,677.17 crore, with a 52-week high of Rs 1364.05 and a low of Rs 774. The daily BSE volume was 106,886 shares traded.

Additionally, both Airtel and Jio boast a user base comprising mid-to-high-end consumers who are more capable of accommodating the potential tariff surge.

"We are turning more optimistic on the near-term sector momentum as we estimate the magnitude of the expected tariff hike to be higher at 20-25% vs. our earlier expectation of 10-15% improve cash flows on the back of hikes to be utilised by telcos to grow high-margin fibre broadband and enterprise/datacenter offerings; and 3) are not keen to disrupt the market dynamics. The visibility of the potential IPO of RIL's telco business Jio, as stated by RIL management in the past, is also a key sector event to watch out for," said BofA Securities.

What happened during the last two tariff hikes?

When tariffs were raised in the past, we didn't see equal benefits for all three telcos. According to the quality of the user base, we witnessed some SIM consolidation and downtrading by a few users. As indicated in the exhibit below, Bharti had the greatest flow through of tariff hikes. We believe this is due to a larger share of mid to high-end users who are less price sensitive. Going forward, we do not anticipate any significant SIM consolidation as a result of a prospective rate hike, but we do anticipate downtrading as consumers transition from higher tariff packs to lower tariff packs.

The telecom landscape has seen varied outcomes following previous tariff hikes. Notably, Bharti Airtel demonstrated the highest flow-through of tariff adjustments, attributed to its substantial proportion of mid-to-high-end users who exhibit less price sensitivity. Yet, projections for the upcoming hike suggest a different trajectory, with minimal SIM consolidation expected but a potential shift towards lower tariff packs.

Reflecting on past tariff adjustments, the divergence in outcomes among telecom players becomes evident. Following the 2019 hike, Airtel experienced a marginal decline of 1% in its subscriber base, while Vodafone Idea witnessed a steeper drop of 7%. Conversely, Jio managed to add subscribers, partly due to its comparatively lesser tariff adjustment, a user base skewed towards higher-end consumers, and no 2G subscribers.

Looking ahead, analysts anticipate a similar hike in FY27 post the upcoming adjustments, highlighting the limited room for average revenue per user (ARPU) expansion in the absence of tariff hikes. The absence of tariff adjustments has resulted in stagnant ARPU for Jio in recent quarters, further compounded by subpar return on capital employed (ROCE) levels due to heightened investments and the lack of 5G monetization.

However, prospects for Jio appear brighter with the projected tariff hikes, which are expected to bolster return ratios in preparation for the anticipated IPO of Jio Platforms in 2025. Similarly, Airtel anticipates significant growth in ARPU over the next three years, driven by the upcoming tariff hike and various strategic initiatives aimed at customer migration and upgrading.

While the telecom industry anticipates a moderate tariff hike post-elections, major SIM consolidation seems unlikely. Instead, operators are poised to navigate the landscape with strategic adjustments aimed at maximising returns amidst evolving market dynamics.