Deep in debt, India’s telecom operators are facing four “moments of truth”, according to JPMorgan Research.
Many investors say a recovery in the industry is near, but these headwinds risk derailing any recovery, the bank wrote.
India’s telecom industry has seen intense competition, fuelled by the entry of Mukesh Ambani-backed Reliance Jio Infocomm Ltd. last year. Incumbent operators rushed to cut tariffs as Jio offered free services for the first six months, and then offered cut-rate data services. It also offered voice calls for free. The price wars left operators struggling to repay debt even as Reserve Bank of India urged banks to set aside higher provisions to deal with bad loans in the telecom sector.
Several investors expect telecom operators, led by Bharti Airtel Ltd., to “embark on an upward growth trajectory” after September, said the report. However, these four headwinds, according to JPMorgan, could derail the recovery.
Case 1: Reliance Jio’s Gradual Withdrawal Of Discounts
The number of subscribers Reliance Jio is able to retain in a normal tariff regime will become clear only when the Mukesh Ambani-led operator starts withdrawing discounts on its basic Rs 309/399 plan, said JPMorgan.
Currently, the effective average revenue per user for Reliance Jio is one-third of what it would earn, if not for discounts.
According to JPMorgan, customers are unlikely to pay more than Rs 303 for Reliance Jio, which is usually the secondary SIM for most. It will have to displace incumbents from the primary SIM slot to be able to get such a revenue from large number of subscribers, the report said.
This also depends on Reliance Jio’s aspirations of capturing 50 percent of the revenue market share by 2020. If market share is the overriding intent for Jio, that would keep industry’s ARPU and growth, in check, the report added.
Case 2: Deep Cuts In Interconnect Charges
The telecom industry is currently split over interconnect usage charges – the fee payable for calls originating from one mobile network and ending in another. Reliance Jio has demanded that the charges be scrapped, while Bharti Airtel wants them doubled.
Deep cuts in interconnect charges constitute a bounded risk to Bharti Airtel and Idea, and a windfall gain for Reliance Jio, the report said.
JPMorgan is worried by the pricing flexibility that would open up for Jio if these charges are cut, or abolished. If interconnect costs are halved, it would bring in Rs 27-30 per user for India’s newest telecom operator.
Jio could choose to pass this saving on to the consumer through price cuts or maintaining its current pricing but that’s an unlikely scenario, JPMorgan said.
Also Read: Why Reliance Jio Wants Interconnect Charges To Be Zero
Case 3: Underwhelming Traction For JioPhone
Reliance Jio has launched an “effectively free” 4G feature phone that it is offering for a deposit of Rs 1,500, redeemable after three years. It has introduced a Rs 153 monthly plan for JioPhone users.
If the phone fails to find traction, then Reliance Jio could “substantially reduce” its Rs 153 monthly ARPU, and or offer free services for a limited period just as it did when it launched 4G services, JPMorgan said.
“This can create ferment at the lower-end subscriber base for peers, though the revenue impact is more limited at this end”, the report added. However, JPMorgan does not expect the revenue disruption at the low end to be anywhere near that of last year when Jio was offering free services.
Also Read: How ‘Smart’ Is Mukesh Ambani’s JioPhone?
Case 4: Short-Lived Pricing Discipline
Pricing discipline, whenever seen in Indian telecom operators, has been “frustratingly short-lived”, said JPMorgan.
According to the brokerage, there has always been an “errant wrongdoer” in the telecom space, starting from smaller players like Tata Docomo to Reliance Communication Ltd. and now, Reliance Jio. However, even larger incumbents have disrupted price on occasions, with Idea Cellular Ltd. more than once blaming Bharti Airtel for an aggressive pricing approach.
“In a rapidly consolidating market, winning players are very keen to outdo their peers to grab the revenue pie being ceded by the smaller players,” said the report.