Mobile data charges in India are among the cheapest in the world. Over the last few years, as competition increased and Reliance Jio made an aggressive entry into the telecom industry with free calls and cheap data, others followed suit. As a result, calls made from mobile phones are practically free today.
Data is also the cheapest in the world. That led to a surge in data usage among Indians. But, even as tariffs tumbled, taxes remained high, in turn hitting the bottomline of companies, especially the incumbent telecom operators, hard.
Late on Monday evening, Vodafone Idea as well as Bharti Airtel announced that they would raise tariffs from December. While the companies did not mention the quantum of hike, the mere announcement of prices being increased—the first such move by telecom operators in several years— got the market excited, given the huge losses that the two telecom companies have encountered in the quarter ended September.
Vodafone Idea shares jumped 25 per cent on Tuesday to Rs 5.58 on the BSE. Bharti Airtel surged 5 per cent to Rs 429.30.
The move to raise tariffs comes just weeks after the telecom operators lost the case related to how they defined Adjusted Gross Revenue. The Supreme Court ruled in favour of the government, which has for long maintained that AGR calculation should also include non-core operations of the companies. This adverse judgment means the telecom companies will have to pay up around Rs 1 lakh crore to the government, which has cast a shadow on the future of the telecom companies.
Both, Bharti Airtel and Vodafone Idea, made provisions for the additional outgo in the recently announced quarterly earnings, even as they may take a legal recourse. Vodafone Idea reported a loss of Rs 50,921 crore in July-September; Bharti Airtel’s losses stood at Rs 23,045 crore. In this backdrop, companies were left with little choice but to raise tariffs.
“The telecom sector is highly capital intensive with fast-changing technology cycles that require continuing investments. It is, therefore, extremely important that the industry remains viable to support the vision of digital India. Accordingly, Airtel will appropriately increase price offerings in the month beginning December,” said Bharti Airtel.
Post its quarterly loss, the largest ever reported by an Indian company in recent years, Vodafone Idea had warned that material uncertainty existed that cast significant doubt on the company’s ability to continue as a going concern.
Finance Minister Nirmala Sitharaman tried to allay fears last week, stating the government did not want any company to shut down and wanted everyone to flourish. It is likely that the government may come out with some relief measures in the AGR issue. The committee of secretaries has reportedly sought recommendations from the Department of Telecom on setting minimum prices for mobile calls and data tariff.
“The acute financial stress in the telecom sector has been acknowledged by all stakeholders and a high-level Committee of Secretaries headed by the Cabinet Secretary is looking into providing appropriate relief. To ensure that its customers continue to enjoy world-class digital experiences, Vodafone Idea will suitably increase the prices of its tariffs effective December 1, 2019,” said Vodafone Idea.
It has also tried to allay concerns over its future, stating that it will continue to “actively invest” in making its network future-fit by embedding new age technologies and launching new products and services.
To do that, the companies will have to strengthen their balance sheet and the tariff increase is a vital first measure in that direction, say analysts.
“Our assessment suggest possibility of a 15 per cent hike by Vodafone Idea and Bharti Airtel in order to go back to the same premium as it used to enjoy over Reliance Jio,” said Motilal Oswal Financial Services.
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The broking firm estimates that for both the companies the hike will be on 45 per cent of their non-feature phone customer base, or 70 per cent of their revenue. It could lead to a significant jump in their pre-tax earnings.
A revenue hike of around 15 per cent could translate to around $1.5 billion in around a year, it is estimated. However, analysts maintain that government relief measures will also be key to alleviate some of the financial pressures.
Some of the relief measures could include lowering of license fees, some moratorium on spectrum charges and staggered payout of the AGR, although, there has been no official statement from the government on this front.
Reliance Jio had recently announced it would charge 6 paise per minute for calls made from Jio to rival networks. What steps other telecom companies take needs to be watched. The telecom operators over the last few months had closed some low-cost plans, migrating customers in the lower band to a higher plan, a move that could lead to higher average revenue per user.
Airtel said it will continue to provide affordable tariffs to customers, but it would also balance the need of the company to remain viable and thereby continue to invest in the much needed infrastructure.
