Tariff Rise: A logical step for the industry

Trends and Developments , June 26, 2013

The high level of competition in the Indian telecom market has ensured that consumers are able to avail of telecom services at affordable tariffs, which are among the lowest in the world. TATA DOCOMO’s introduction of a “one paisa per second” scheme in 2009 proved to be a game changer and led to almost every operator in the market – around 13 at the time – entering into an aggressive price war. Operators registered significant subscriber additions but, in fact, the growth was mostly a result of double counting as consumers were using multiple SIMs. This translated into lower ARPUs for operators.

Over the years, the aggressive price wars and declining ARPUs have started impacting operator margins. Several regulatory and policy developments in the past few years also had serious implications for operators’ financial health, making survival at rock-bottom tariffs impossible.

As a result, the sector has of late been witnessing a reversal in tariff trends with operators hiking rates in order to stay afloat. Bharti Airtel, Reliance Communications (RCOM), Idea Cellular and Vodafone India have increased their tariffs by 20-33 per cent in the past six to nine months in a logical but unprecedented move for the Indian telecom industry. takes stock of some of the developments that have made tariff hike a favourable proposition…

A key development that impacted operators’ financial health was the need to pay a huge amount as spectrum fee for acquiring 3G and broadband wireless access licences in 2010. Service providers, which were already operating on wafer-thin margins, paid a cumulative amount of Rs 670 billion as spectrum fee, most of which was financed through debt. Service roll-out following the auctions also required substantial investments, putting further pressure on their capex. The huge debt and interest payouts weakened their credit profile. Meanwhile, the lukewarm response to 3G services added to their woes. Most operators did not witness an increase in profits for several consecutive quarters from 2010 onwards. For instance, Bharti Airtel recorded its thirteenth straight quarter of declining profits in January-March 2013. RCOM’s debt stood at Rs 388.64 billion as of March 2013 (the company already has one of the highest debt-equity ratios of 1.35 in the industry). The company’s repeated attempts to sell its tower business to raise funds have failed so far due to disagreements over its valuation. Meanwhile, Vodafone India is expected to pay a huge amount to the government as tax, which would put its financial position in jeopardy. Other operators are also struggling to put their finances in order. Limited internal funds coupled with poor creditworthiness have prevented them from venturing into new growth markets such as rural areas and broadband.

The competitive landscape in the sector has also undergone a major change following the cancellation of licences in February 2012. The Indian telecom industry currently has fewer operators, several of which do not have pan-Indian operations any more. Consequently, the hypercompetitive environment has stabilised and operators are not as aggressive as before in their pricing strategy. Subscriber acquisition has given way to subscriber retention and enhancing revenues has become a key focus area.

Several regulatory and policy changes introduced by the government are likely to have a serious bearing on operators’ profitability. To begin with, the licences of most operators will come up for renewal beginning 2014, entailing a huge outgo for them. As a part of the renewal process, the government is proposing to refarm spectrum, wherein it will take back spectrum in the 900 MHz band from operators and instead make spectrum available in the 1800 MHz band, which would need to be acquired through an auction. Bidding in these auctions will be crucial for incumbent operators to continue offering services to their existing customers. Further, the government’s move to charge operators a huge one-time fee for holding additional spectrum beyond the prescribed limit has come as a rude shock for the industry. This is likely to result in operators making payments of Rs 315 billion to the government. The policy move to abolish roaming charges will further dent operator revenues. Roaming revenues help operators cross-subsidise voice calls. Incoming and outgoing roaming calls are charged at higher rates as compared to those in the home network. Although roaming subscribers comprise only about 10 per cent of the total subscriber base at a given point in time, they contribute significantly to operators’ overall revenues.

In light of these challenges and developments, a tariff increase seems to be a logical step for operators to survive. This exercise is likely to result in an improvement  in the financial performance and creditworthiness of operators and lead to a 25-30 per cent increase in voice-per-minute realisations over the short to medium term. Currently, most of the hikes have been in the form of discontinuing certain discounts and promotional offers, instead of an increase in headline tariffs. Industry analysts believe that the hikes will be gradual and will vary from circle to circle in order to avoid a sudden dip in volumes.

While the effects of this trend reversal are yet to be seen on operators’ businesses, it is certain that the era of rock-bottom tariffs is over for now.


Copyright © 2010, All Rights Reserved