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RJio tariff hike: Near-term relief for incumbents

Move is positive for sector though it doesn't indicate pricing power as even at current rates, tariffs are attractive compared to incumbents

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Compiled by BS Research Bureau
Ram Prasad Sahu
Last Updated : Oct 21 2017 | 3:30 AM IST
Reliance Jio’s (RJio) revision of tariffs, which includes a reduction in the validity period, is a positive for the telecom sector and will ease some pressure off the incumbents. The company has reduced the validity period of its Rs 399 plan, considered its flagship, to 70 days from the earlier 84 days and introduced a new plan in its stead at Rs 459, with similar benefits. 

The new plan is 15 per cent more expensive than the previous plan. This is the second (upward) revision for RJio tariffs after it became a paid service from April 1. The last revision saw the company’s effective average revenue per user (Arpu) increase by 35 per cent to about Rs 121. This was over 20 per cent lower than incumbents’ Q1FY18 Arpu of Rs 134 (Idea) and Rs 158 (Bharti Airtel). The latest hike bridges the gap a bit between RJio and the incumbents. 

Compiled by BS Research Bureau
Analysts say the price revision is a positive trend in the sector, helping ease the pressure, but may not constitute pricing power. Further, an analyst at a foreign brokerage says given RJio’s strengths in the spectrum, technology, network, and product offering, it would leave enough room for the company to effect more hikes. Ambit’s Vivekanand Subbaraman, in a recent note prior to the recent hike, says investor optimism on RJio’s “Arpu focus” is misplaced as the company has been exceptionally successful in the data market with its strategy of undercutting; it has an 85 per cent share of 4G LTE handset consumers as its robust data offering (1GB/day and unlimited voice) is effectively priced at Rs 110-120 (lower than incumbents). 

The company has other levers. The cut in interconnect usage charge from 14 paise per minute to 6 p a minute from October 1 gives it the flexibility to aggressively expand its market if it chooses to do so. If the company maintains or hikes rates (by reducing validity) it would be positive for RJio’s financials both at the revenues and the operating profit levels. The company, which posted revenues of Rs 6,174 crore at an Arpu of Rs 156 for the quarter ended September, should get a major boost on the top line both from the current hike as well from customers moving to higher-priced packs from existing plans.  

While the new plans are positive for the sector and incumbents, the near-term worry would be the promotional tariffs for its 4G feature phones. Attractive initial tariffs for the phone will increase competitive intensity for incumbents and will be a major risk as the lower end tariff segment accounts for half of their incumbent revenues.