Telecom Lead India: Reliance Communications has increased mobile tariffs.
RCOM raises base tariffs; significant or irrelevant? In a bold and perhaps risky move, RCOM raised base tariffs by 25 percent to 1.5 paise/second from 1.2 earlier in four circles (MP, Gujarat, Bihar and HP) and clearly stated its intent to extend the base tariff increase to other circles over the next one month. The significance of the event lies in the fact that this is the first time a challenger’s pricing move tacitly admits the need for immediate P&L improvement. The irrelevance of the event lies in the two key operative words in the title of the note – ‘RCOM’ and ‘base tariffs’. We remain constructive on incumbents and would use the positive sentiments to sell RCOM.
The event – RCOM hikes base tariffs in four circles; to extend the same pan-India in 30 days
In a not-completely-surprising yet bold and perhaps risky move, RCOM, the fourth largest wireless operator in India, raised base tariffs in four circles (MP, Gujarat, Bihar and HP) by 25 percent to 1.5 paise/second from 1.2 paise/second earlier. The company also stated its intent to expand the scope of base traiff hikes to the remaining 18 circles over the next one month. We note that this is the second bold price hike move across players in the industry, the first one being the 20 percent base tariff hike announced by Bharti in July 2011.
Some random thoughts – the event has equal potential to be significant or irrelevant
Aware of the risk of sounding confused or appearing to hedge, we would prefer stopping shy of forming a decisive view on what the event means for RCOM and for the industry. What happens
over the coming months, especially in terms of response from competitors, customers, and possibly the regulator would determine the significance or irrelevance of the move. Some random
thoughts on the event, in no particular order of importance –
Base tariff hike would mean little if aggressive tariff discounting through special tariff vouchers continues. We have seen the movie before. Nearly all leading operators (led by Bharti) had raised base tariffs for new subscribers by 20 percent from 1 paise/second to 1.2 in the months of July/August 2011; extant subs were to move to the new base tariffs upon completion of their old tariff validity period. What followed was a modest flow-through of the price increase into financials and RPM metric for a couple of quarters and renewed price competition through aggressive base tariff discounting thereafter (ironically, again led by Bharti).
Interestingly, even as base tariffs have stayed at the increased levels, voice RPM has retraced its way back to the pre-hike Jun 2011 quarter levels for most operators. In essence, aggressive discounting has taken away all the benefits (and more, perhaps) of base tariff hikes. Bottomline – a base tariff hike would mean nothing for the RPM metric unless aggression on special tariff voucher also comes down. Jumping to any conclusion without seeing developments on STVs is futile. Base tariffs are just rack rates; the flow-through to effective pricing involves discounting strategies.
Effective voice RPM of an operator (and for the industry) is a function of # of subs or volumes under various tariff plans – subs on base tariffs typically yield the best RPM while those using discounted STVs yield lower RPMs. A base tariff hike could induce more customers to move to using STVs as a base tariff hike makes using an STV an economical proposition for an increased number of customers. We illustrate this with an example in Exhibit 2. This also has implications for assessing the RPM impact of base tariff hikes. We discuss this later.
By Kotak Institutional Equities