Re-evaluating our tariff hike thesis – we are not worried!

Reliance Jio (RJio) has recently introduced new tariffs in its postpaid category, and made its fixed-broadband base plan more affordable. This has heightened anxiety among investors on potential increase in competitive intensity in India mobile services, and significant delay it might cause in effecting price hikes. We have analysed each aspect, and have provided historical reference to support our view that RJio’s new plans are not a cause of concern. In fact, this is the first time postpaid tariffs have been increased since RJio’s foray into telecom in Sep’16. Reliance Industries is wonderfully leveraging its vantage position whereby it owns India’s most popular sport property IPL (via its digital rights), which enables it to gain market share in telecom services categories where it has relatively lagged. We believe price hike probability will rise again post completion of IPL-2023 season in prepaid category. We have assumed only ~4% tariff hike in Bharti’s ARPU assumption over next two years, which we believe is reasonable (no downside risk!). Bharti Airtel is our preferred pick in India telecom space.

Why RJio has turned aggressive on postpaid and FTTH expansion?

• The street is concerned by the new tariff plans recently introduced by RJio in postpaid and fixed-broadband categories.
• These are affordable family plans wherein RJio has introduced new packages starting at Rs399/month, a 20-40% discount to Bharti’s. However, in the less talked-about move, RJio has increased its postpaid base plan price by 50% to Rs299 (from Rs199 earlier).
• RJio’s postpaid plans’ discount to Bharti has been at 33-50% previously, which now stands at only 20-40%. This implies RJio has narrowed its postpaid pricing gap vs Bharti, which is a positive in our view.
• We are not worried about Bharti’s ability to retain its postpaid subs, and grow. We believe RJio has only plugged the postpaid offerings gap so as to benefit from sub churn, if any, for VIL.
• RJio has launched its most affordable fixed-broadband plan starting at Rs198/month, with generous entertainment bundling at Rs100, and Rs200/month additional payment. It appears RJio is likely to disrupt the pay-TV market, which could fail to match its attractive proposition.
• In our view, RJio has increased its activities around IPL-2023 season where its brand recall may have a positive impact. It is trying to encash the positivity through increasing its market share in telecom services categories where it relatively lags.

Was there a correlation in tariff hikes across categories, historically?

• Our analysis of tariff changes by RJio across categories, viz., prepaid, postpaid and fixed-broadband, has shown no material correlation.
• The prepaid unlimited data (84-day plan, represents the unlimited data offering) category prices have increased more than 2x since its commercial launch in Apr’17.
• Postpaid base plan price has increased for the first time in Mar’23 since RJio’s foray into telecom.
• Fixed-broadband prices continue to grow on the affordability index as RJio is working to expand its total addressable market (TAM).
• RJio’s pricing strategy is formulated independently given that its market share varies across each categories. It enjoys dominant >50% market share in 4G subs while its pie in postpaid and fixed broadband categories is much lower.

Reliance Industries (RIL) is building converged digital ecosystem founded on its advantageous position arising from its owning digital rights for IPL

• Viacom18 (RIL group company) won IPL digital rights for CY23-CY27 for Rs238bn. JioCinema is now showcasing IPL-2023 (started from 31st Mar’23) with significant investment into technology for absolute free.
• JioCinema app achieved download of 25mn in a single day and 16mn viewers watched the opening match live simultaneously. The total match views reached 500mn viewers.
• RIL is leveraging all its properties to make its IPL foray a huge success, and connectivity is the focus area to achieve the goal. We believe completion of IPL-2023 should pave the way for increasing tariffs for telecom services.

Does this put our assumption of Bharti’s ARPU growth at risk?

• We have assumed Bharti’s mobile business ARPU to register a CAGR of 8.4% over next two years (vs exit Q3FY23 ARPU).
• Our assumption includes natural ARPU growth of 4-5% from 2G to 4G/5G, prepaid to postpaid and better data monetisation.
• We have assumed just ~4% CAGR in tariff hikes by Bharti over next two years, which we believe is reasonable. Therefore, we don’t see much risk to our assumptions.

For report, https://www.communicationstoday.co.in/telecom-re-evaluating-our-tariff-hike-thesis-we-are-not-worried-icici-securities/

CT Bureau