Reliance Jio's decision to collect six paise a minute from its mobile users for calls made to subscribers of another network could be the good news telecom sector has been waiting for a while.

When Reliance Jio launched its services, it had announced that all voice calls will be given for free. This had put tremendous pressure on the incumbent players who were charging around Re 1 a minute, and most of its revenues were coming from voice calls. Following Jio's entry, profit margins of the incumbent operators crashed drastically.

Read also: RJio to charge 6p/min for calls to rival networks

The latest announcement by Jio to increase tariffs from zero to six paise a minute may not do much in terms of giving elbow room for incumbent players to increase tariffs immediately, but it improves sentiments for the industry. It also enhances margins for Reliance Jio.

"We do not expect any impact on Jio’s net adds momentum on the back of this. Subsequently, we do expect net IUC expense in Jio P&L going to zero helping overall margins (i.e. offsetting impact of any capitalized costs being expensed). Sentimentally we consider this move to be positive for Bharti/VIL, though fundamentally we do not think things materially change," analysts at BofA Merrill Lynch said in a research report.

Read more: RJio’s decision to charge users for IUC may be followed by tariff hikes

Market share

Jio's launch of mobile services marked a significant milestone in the evolution of mobile pricing in India, as the company effectively charged only for data services. Pricing came under significant pressure, with Jio using it as a critical tool to gain market share. Jio is eyeing a 50 per cent market share, and given that it has grown to take nearly 35 per cent share already, the company could shift its game plan to focus on revenue.

Outlook

According to a Credit Suisse report dated September 27, 2019, average revenue per user for the overall industry is set to improve 25 per cent in FY2022, with Jio closing in on its target. The latest price revision would mean that the ARPU may increase even before 2022. That should be good news for Airtel and Vodafone-Idea, which has had a tough 24 months.

According to an analysis done by researchers at Kotak, the increase in tariffs would mean incremental revenues of ₹1,790 crore per quarter for Jio. "One needs to adjust for the ₹720 crore IUC cost that was assumed to be going down to zero. Net revenue uplift would be ₹1, 070 crore a quarter or ₹4, 300 crore per annum. EBITDA uplift would be around ₹3,700 crore per annum for Jio. So, gross ARPU uplift of ₹19/sub/month, assuming no price elasticity on off-net volumes. There would of course be some elasticity, so the net ARPU uplift could be lower at around Rs15 or so," Kotak said in a research report.

The report said that there could be a meaningful ARPU increase for Bharti and Vdofone Idea too. "If Jio gets ₹15 ARPU uplift, we believe Bharti and VIL could see a ₹8-odd and ₹6-odd ARPU uplift, respectively, as well. With 282 million and 327 million average subs in 1QFY20, rough annualized revenue/EBITDA uplift for Bharti and VIL works out to s₹2700/2300 crore, and ₹2350/2000 crore, respectively," it added.

UBS research said that the impact could be higher on Vodafone Idea. "While the magnitude of positive impact on VIL is higher than Bharti and Jio given the base effect, our view remains that VIL still is a few quarters away from stabilising market share and highly geared balance sheet puts the medium-term market share at risk,"UBS said.

But Bharti and VIL still generate more than 50 per cent of their traffic from customers on 2G and voice plans and they may not increase prices for these customers. This could somewhat reduce the positive EBITDA impact on the two operators.

Analysts at CLSA said that even if Airtel and Vodafone Idea did not hike tariffs, Reliance Jio’s latest move would likely make incumbents’ current tariffs more competitive. " Assuming unchanged voice usage, Reliance Jio’s IUC levy will likely bring its 84-day plans’ effective tariff in line with Bharti Airtel and Vodafone Idea vs the current 13 per cent discount. Even if Reliance Jio’s off-net outgoing usage declines 30-50 per cent, Reliance Jio plans’ discount to Bharti Airtel and Vodafone Idea’s unlimited plans would be lowered to 3-6 per cent. Further assuming Bharti Airtel and Vodafone Idea maintain tariffs at current levels, our FY21 Ebitda could be 2-11 per cent higher, respectively,"CLSA said.

Airtel's share price was up by 4.94 per cent on BSE at 11: 40 am on Thursday. Vodafone Idea was trading up at 5.4 per cent on BSE.

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