Telecom rates have begun to rise after two years. Is it, however, sufficient to prevent the sector from becoming a virtual oligopoly?
Reliance Communications unleashed a bombshell in the telecom market in 2015. They reduced rates, gave low-cost data plans, and completely changed the ecology. Thousands of people queued overnight to change their cellular provider. Jio, on the other hand, became a darling of the investment community.
It's a strategy that many well-funded firms have employed in the past. To begin, entice buyers with low prices. Then, with your vast funds, knock out the competitors cold. You may then boost charges after you have the consumers locked in. And, if all goes well, consumers will be forced to accept the status quo because they will have no other option.
Bharti Airtel and Viacom were among the private incumbents hit by Jio's blitzkrieg (formerly Vodafone Idea). Vi was on the verge of collapsing, while Airtel was on firmer foundation. Its stock price plunged by more than 90%, and it became a penny stock—a company with a price in the single digits.
After a two-year sabbatical, Airtel and Vi have finally decided to step up their game. They've raised prepaid cellphone plan charges by 20–25 percent and aren't concerned about losing clients. This isn't even the first trek of the season. In only two quarters, the rate for the basic bundle (targeted at 2G subscribers) quadrupled from Rs 49 to Rs 99. And, by all accounts, they seem to be finally going on the attack, putting profit first.
Will this, however, work? Especially for VI, which is still experiencing financial difficulties?
The plain explanation is that tariff increases may not be sufficient to ensure existence. Take, for example, the tariff increase in 2019. Analysts expected a significant increase in profits at the time (before interest and tax). However, real profits only increased by a fifth of what was predicted.
In addition, it is losing subscribers.
With a customer base of 408 million, Vodafone and Idea merged in 2018 to become India's biggest telecom. This has dropped to 253 million by September 2021. No one seems to want to be a member of Idea's network any more (perhaps due to quality issues). Overall, the average revenue per user (ARPU) has fallen over time and is presently at Rs 109, which is 40% lower than Airtel's ARPU.
Its debt hangs around its neck like an albatross.
The debt of VI is projected to be Rs 1.8 lakh crore (which includes whatever it owes to the government). Vi, on the other hand, is cash-strapped. It has a cash balance of only Rs 250 crores. It also needs to service Rs 6,400 crores in short-term debt (due before February 2022).
The firm has to obtain additional funds in order to grow. However, the promoters have not contributed this amount. No, not yet. External investors will be less than thrilled if the promoters aren't confident in their ability to keep the firm afloat. As a result, a rate rise may not be enough to compensate for the cash leak.
It isn't putting enough money into the future.
One thing you should know about the telecom sector is that it is a money-laundering engine. The cost of network infrastructure, spectrum allotment, fibres, and cable connections is all quite high. And a corporation that is striving to pay off debt from the past will be unable to devote funds for the future. Consider the most recent quarter, when Vi invested barely Rs 1,300 crores on infrastructure compared to Airtel's Rs 4,600 crores. With out-of-date equipment, there's only so much you can accomplish. They'll continue to lose customers if call quality doesn't improve.
The Jio factor is still a problem for the corporation.
Remember when we spoke about Reliance Jio's latest phone, the JioPhone Next? At Rs 6,500, it seems to be rather pricey at first glance. But here's the thing: here comes the tricky part. Nearly 140 million VI users are on the 2G plan, which has seen a 100 percent price increase in the last two quarters. Suddenly, the JioPhone Next's offer may not appear so awful, and 2G consumers may be enticed to switch to Jio's 4G network. And Vi's customer base might shrink even further, negating any benefits from the rate increase.
So there you have it, the tariff increase by itself may not be enough to rescue Vi. It will have to rely on Jio to cooperate and raise rates in tandem with them. It must also seem appealing enough to entice foreign investors to join the party. For the time being, the telecom war will go on.
(Source: Finshots)
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