Telecom Sector Duopoly Still a Possibility with No Tariff Hikes

Analysts said that the Union government initiatives for the telecom industry provides a “breathing room” for Vi and that a steep tariff hike is a “must” to prevent duopoly.

Published by
Bala Yogesh

The Telecom industry in India can still “slip towards a duopoly” in absence of a “sizable tariff hike,” multiple analysts say. The Union government on Wednesday announced a set of “structural and process reforms” for the telecom industry to “promote healthy competition” and to “generate employment opportunities.” The measures announced by the Union government included a four-year moratorium for telecom companies to repay dues to the government along with the revised definition of adjusted gross revenues. While analysts say that the measures are a “welcome step towards strengthening the industry,” it was also highlighted that the steep hike in tariffs is a “must.”

Union Government Measures Provides A “Breathing Room” for Vodafone Idea

Edelweiss Research, a leading domestic institutional brokerage house on Wednesday said that the measures announced by the government have “resuscitated the idea of a three-player market for the time being.” The firm in its note said that measures provide a “breathing room” for Vodafone Idea (Vi), the third-largest wireless operator in India.

“However, we believe policy support alone cannot solve VI’s problems,” Edelweiss Research said. “VI needs a tariff hike coupled with a capital infusion at the earliest.”

The firm highlighted that the duopoly scenario would “benefit” Bharti Airtel and Reliance Jio and that “beyond policy package,” there exists a “key issue” in the telecom industry.

“The major issue plaguing the sector continues to be unreasonably low tariffs,” Edelweiss Research said. “While companies have raised tariffs, meaningful ARPU improvement can be achieved only with tariff hikes in 4G prepaid plans.”

Sunil Bharti Mittal, Bharti Airtel chairman has often said that the average revenue per user (ARPU), a key financial metric, needs to hit Rs 200 “very quickly.” In late August, Mittal said that the telecom “industry needs to be at 300 rupees per customer per month” eventually.

Dolat Capital, the financial firm engaged in the trading markets on Thursday said that the hike in tariffs “though inevitable for revival” of Vodafone Idea, may now “take longer and could be gradual.” The firm in its note said that the telecom industry might now witness a 10% to 15% hike in tariffs as compared to the 25% to 40% as expected previously.”

“However, [a] four-year moratorium is a substantially long period for revival that may delay the tariff hikes,” Dolat Capital said. “The up-and-down history of the sector create doubts from time to time.”

Revised AGR Definition A “Much-needed Change” for Telecom Operators

Meanwhile, Axis Securities, a subsidiary of Axis Bank on Thursday said that the revised definition of AGR along with the elimination of the penalty for spectrum dues has been a “much-needed change.” The Indian government on Wednesday said that the non-telecom revenues will not be included in AGR.

“This extra burden has hurt the telecom industry in the past but the new reform will now pave the way for telecom players to make higher capital investments,” Axis Securities said in its note. “We believe the relief package is a welcome step towards strengthening the industry and ensuring the survival of Telecom operators as well as maintaining healthy competition for the benefit of the customers.”

Crucially, Motilal Oswal Financial Services in its note on Thursday said that Bharti Airtel and Reliance Jio “may not avail the moratorium on the annual deferred spectrum” as the operators have “sufficient liquidity position.” The Indian diversified financial services firm said that the second-largest wireless operator in India might also not avail the moratorium on AGR payments.

“Both players could avail better rates in the market compared to the government’s higher rate of interest,” Motilal Oswal said.” A weak third player and the government’s efforts to save VIL certainly builds a strong case for a tariff hike in the near term compared to a stronger two-player market.”

Additionally, the firm highlighted that Vodafone Idea AGR dues payments is “subject to business generating sufficient cash flow” in the long term and thus it “needs be addressed.”

“The moratorium helps to solve the immediate liquidity woes of VIL, but its ballooning debt and annual EMI after four years will be difficult to address,” Motilal Oswal said.

It has to be noted that the telecom operators including Reliance Jio and Bharti Airtel welcomed the measures announced by the Union government on Wednesday. Further, Nick Read, chief executive officer at Vodafone Group said that the measures will be the “beginning of a new era for India’s digital ambitions.”

Bala Yogesh

Born in India, Yogesh loves to travel and has lived in multiple countries including New Zealand and Canada. His bylines can be found on various newspapers and blogs throughout the world, including Vancouver Sun, Surrey Now-Leader, Daily Hive , Investing News Network and Rach F1.

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Published by
Bala Yogesh

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