India’s Bruised Telecom Operators Got A Lifeline. Here’s How It Will Help...

Already struggling because of an unabated tariff war unleashed by Reliance Jio Infocomm Ltd., the Supreme Court order last month asking telecom operators to pay pending dues worth thousands of crore threatened to cripple operations of Bharti Airtel Ltd. and Vodafone Idea Ltd. The two have now received a lifeline.

Not only has Reliance Jio, controlled by Asia’s richest man Mukesh Ambani, joined them in announcing an increase in tariffs, the government also deferred spectrum payments by two years. That would ease pricing pressure and provide critical cash flows.

The incumbent wireless carriers were driven deep into debt after Ambani’s telecom unit started offering free calls and dirt-cheap data in 2016. An adverse ruling by the Supreme Court on the method to calculate levies, or adjusted gross revenue, only put an additional burden of more than Rs 50,000 crore on Bharti Airtel and Vodafone Idea. The two companies even flagged concerns about their ability to continue as a “going concern”.

The operators were left with no option but to increase tariffs. The government chipped in too. The cabinet yesterday approved that the operators won’t have to pay any deferred spectrum liability due for years ending March 2021 and 2022, amounting to nearly Rs 42,000 crore. These amounts will be equally spread over the remaining years without any increase in the time period. That means, the companies would be able to conserve their annual cash flows and manage their capital expenditures and working capital better for the next two years.

Vodafone Idea pays Rs 11,600-12,000 crore towards spectrum auction dues annually, while Bharti Airtel and Reliance Jio pay Rs 5,800-6,500 crore and Rs 3,000-3,500 crore, respectively.

Here’s how higher tariffs and delayed spectrum payments will impact operators:

Subscriber Churn

Bharti Airtel and Vodafone Idea had earlier increased tariffs for their cheaper plans. From the third quarter of last financial year, the companies started charging a minimum monthly amount from users—a minimum recharge of Rs 35—as they planned to increase focus on better-paying customers and lower costs.

But that led to a massive subscriber churn for both the operators. Their active user base declined by more than 13 crore in 11 months to September 2019.

But since then, Reliance Jio too has increased prices. In October, it first started charging for outgoing calls and introduced new plans bundled with interconnect usage fee in the range of Rs 10-100, implying an effective price increase of 12-15 percent. The impact of that increase on subscribers is yet to be seen as the data have yet to be released.

According to Sanjay Kapoor, former chief executive officer of Bharti Airtel and a telecom expert, any potential subscriber churn after latest increase in tariffs shouldn’t matter to the operators now. “The price hike could lead to fallout among the low-end customers,” he told BloombergQuint over the phone. “But for operators at this stage survival and sustenance is more important than retaining the marginal customers.”

Moreover, he said, the churn would depend on the scale of price increases as all operators are implementing hikes and could well be lower for the older operators as this would be the second hike by Reliance Jio. But if the quantum of price hike by older operators is more than that of Reliance Jio, there could be further market share losses, he said.

“If the quantum of price hike is similar, then customer churn would completely depend on the experience provided by the competing telecom operators.”

With the hike in prices, Kapoor said the competition is bound to move from price leadership to experience leadership. Additional revenues from price hikes will have to go into improving customer experience, he said.

Profitability

None of the three operators have announce the quantum of tariff hike. But BloombergQuint’s analysis shows that even a 10 percent increase will boost their operating profit by between 20-37 percent.

The analysis is based on the last 12-month revenue and the assumption—based on industry’s experience—that 80 percent of incremental revenue would flow into operating profit as costs won’t rise much.

This rise in operating profit will not only lower leverage, but also help the companies pay dues to the government—which charges licence fees at 8 percent and spectrum usage charges at around 4 percent on the incremental revenue.

While the delay in paying spectrum dues won’t have an impact on earnings, it could help improve balance sheets by lowering leverage. The companies can use the cash saved to repay existing debt.