Telecom operators such as Bharti Airtel, Idea Cellular, BSNL, Reliance Communications, Vodafone India, among others, may post 5-7 percent drop in revenue in Q3 and Q4 due to Jio 4G and current currency crisis.
The extension of free offers from Reliance Jio Infocomm, the 4G venture promoted by Mukesh Ambani, has intensified pricing pressure on rival telecoms such as Bharti Airtel, Idea Cellular, Vodafone and Reliance Communications.
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Reliance Jio will be extending its free voice and data offers to March 31, 2017 from December 31, 2016 to both new and existing 4G subscribers, as part of its strategy to achieve 100 million 4G customers during the current fiscal. Jio has 52 million 4G customers at present on its network as part of the Welcome Offer.
ICRA India, a leading credit rating agency, noted that Jio’s launch has come at a time when the Indian telecom industry is already facing pressure on operating metrics. The voice segment has been witnessing a constant decline in realisations amid stagnant usage. This has translated into steady decline in ARPU.
Competitive intensity has pushed the realisations downwards from 37 paisa for Q1 FY2015 to 32.2 paisa for Q2 FY2017 for the ICRA Sample (Bharti Airtel, Idea Cellular and Reliance Communications). Voice ARPU declined from Rs 146 for Q1 FY2015 to Rs 123 for Q2 FY2017.
Data ARPU for the ICRA Sample saw improvement till Q4 FY2016. Post that, there has been a decline as pressure on realisations remains intense. The picture in Q2 FY2017, after a one-month impact of Jio’s launch, shows the industry’s pricing pressure.
Jio’s free voice calls will result into drop in voice realizations. Since rivals responded to Jio’s data pricing, which was at significant discount to the market prices, data ARMBs will be trending lower in the coming quarters.
Pricing apart, Jio has various pull-factors:
# big bang launch with a novelty factor
# fresh network which points to good service
# strong device ecosystem
“Extension of Jio’s free period till March 2017 will keep the pressure on incumbents high in terms of pushing the subscriber acquisition costs high and keeping pricing levels competitive,” said ICRA in a note issued on Wednesday.
Post free period, Jio’s ARPU is expected to be higher than existing industry levels.
Jio has achieved more than 50 million subscribers as on date. The fact that rivals have not reported any decline in subscriber base – Bharti and Idea reported data subscriber additions of 9 million in Q2 FY2017 – indicates that Jio subscriptions are in the form of the second SIM.
Jio can be under pressure later
“What remains to be seen is that how many subscribers migrate to the paid subscription of Jio once the free period is over. This in turn would critically depend on the service experience and pricing strategies in the longer term,” said ICRA.
A low conversion rate can dent the return on investment for Jio and elongate the pay-back period.
At the announced tariff plans, the ARPU levels which can be achieved are likely to be higher than the existing industry levels, albeit at higher consumption.
Jio’s lowest plan, which offers unlimited voice calls and 300 MB data is for Rs 149, whereas the average industry ARPU for the quarter ended June 30, 2016 was around Rs 166.
Jio is likely to push for high subscriber acquisition and higher usage, even at the cost of weak returns in the initial years. The telecom industry is likely to witness protracted pricing pressure which is likely to reflect in lower EBITDA generation.
This comes at a time when the telecom industry is reeling under an estimated debt of more than Rs 425,000 crore.
Currency issue
The recent move of demonetisation of high value currency can lower the revenue of the telecom sector by 3-5 percent in Q3 and Q4 of FY2017. This impact is expected to be driven largely by a decline in consumption of voice/data, especially by the pre-paid users.
The impact of demonetisation on the post-paid business is expected to be limited only to the extent of delays in bill payments, and not a material revenue loss.
The major impact of demonetisation is expected from the pre-paid segment which accounts for around 95 percent of the total subscriber base and around 80 percent of the revenues.
Any curtailment in consumption would be a revenue loss for the industry, which ICRA pegs at 3-5 percent. The movement towards a cashless economy is expected to have a positive impact as it would result in higher use of electronic payment methods and ewallets powered by data networks.
ICRA says the Indian telecom industry is set to face headwinds with revenues set to be impacted by 5-7 percent over the next two quarters.
Baburajan K
[email protected]
