Telcos bank on premiumization as they chase revenues

While tariff hikes and premiumization are set to continue in the medium term, the risk of SIM consolidation remains.

As FY 2023 unfolds itself, the telcos are upbeat about their prospects. Analysts too are bullish on the sector, and see a good scope for operators to improve their respective ARPUs. The potential is further reflected in the confidence the investors have reposed in this space – the sector was one of the top performers with 42 percent gain in FY 2022.

Devising new strategies to jack up revenues, especially in view of the requisite investment for the rollout of 5G services, would be the focus of telcos in the near term.

Premiumization is the name of the game. It may be a bit too early to speculate about the strategies telcos will formulate as they enter a post-Covid era. Going by the trends visible, they are, however, certain to continue with the premiumization of tariffs.

Earlier, telcos had moved to 28-day plans for subscribers, as stiff competition prevented them from raising tariffs. In November last year, tariff rates were hiked by 20–22 percent, and validity extended to 30 days.

Premiumization of tariffs, despite SIM consolidation, is only the beginning of a trend. More hikes are on the anvil. Airtel has announced that in the offing is a 2–3 times increase in mobile tariffs over the next few years. There is little doubt that its counterparts would also follow.

While a hike in tariffs is expected to improve the viability of services offered, premium-priced digital services that are loaded with data and entertainment packages are fast gaining traction. Much to the relief of the operators, higher tariffs, supplemented by premium digital services, have been raking in revenue, supporting investment in 5G infrastructure.

Aided by increased data usage, the growth in revenue is expected to register a steady rise in the next couple of years, defying the uneven trend of the past five years.

Revenues of telcos grew 23 percent in FY19 to ₹487,956 crore, from ₹400,000 crore in FY18, according to brickworkratings.com (BWR). In FY20, revenues declined 5 percent to ₹465,209 crore. The fall was a steeper 17 percent in FY21 at ₹384,940 crore.

The rating agency has estimated a revenue of ₹415,735 crore, an increase of 8 percent in the just concluded FY22. The telcos are expected to clock an 18-percent revenue growth in FY23, touching ₹490,567 crore.

Studies by other rating agencies have also affirmed that tariffs are set to increase.

This includes a steady increase in data usage by 6–8 percent in FY22, according to BWR. The wireless data usage on average increased by 37 percent in Q2 FY22. In absolute terms, data usage increased from 25,227 PB in September 2020 to 34,568 PB in September
2021.

The trend of increased data consumption is set to continue, as the momentum of the shift to 4G network continues. It makes it possible for the subscribers to meet their work and education requirement, which in turn, will accelerate to an increase in the companies’ total revenues.

Service providers have shown a keen interest in retaining high-paying customers by continued priority to premium services.

New smartphone users will cheer up the telcos. Even as the telcos persist with premiumization, they are keen to cash in on migration from feature phones to smartphones.

Airtel’s and Jio’s partnership with Google will also push migration to smartphones across price ranges. According to an analyst, the partnership presents an opportunity to leverage a large pool (an estimated 300 million) of feature phone subscribers through Google-enabled affordable devices. This is apart from the prospect of monetizing cloud services to small businesses.

Operators nurse an ambition of achieving an ARPU of ₹300, and generate reasonable return on capital employed. The premiumization of tariff seems to be designed to achieve this target in the medium term. At the same time, high-speed data ensures the price does not hurt the subscriber.

Aided by migration to 4G network, growth in data usage and tariff hikes, BWR pegs an increase in ARPU by 24–25 percent in FY22.

Even with this projected growth, an ARPU of ₹300 looks a tall order to meet because operators need to almost double their present ARPU for this. Reliance Jio’s ARPU was ₹151.6 in October–December 2021, while Vodafone’s stood at ₹115. In Airtel’s case, it was ₹166 in the same period.

After two successive years of fall in ARPUs – 26 percent in FY 18 and 13 percent in FY19 – growth resumed in FY20 (15 percent) and went up further to 23 percent in FY 21. This reversed the declining trend in ARPU.

The projected growth in ARPU in FY22 is 22 percent, expected to increase to 30 percent in FY23. A large part of the increase is attributed to the increase in data usage in the pandemic-induced lockdown, during which corporate entities, small and medium enterprises, and educational institutions operated online.

The launch of 5G services may not immediately enhance ARPUs. A recent Vi submission to the Telecom Regulatory Authority of India (TRAI) said that data from 23 countries that launched 5G services shows that their overall weighted ARPU in the first six to 10 quarters went up by a mere 1 percent. In 13 of these countries, ARPUs declined after the 5G launch. A case point is Australia where ARPU fell 2 percent.

Operators have been hard-pressed to look for avenues to maintain cash flow and improve their balance sheets. Increasing mobile tariffs is one of the major routes followed by the telcos. In this backdrop, it seems unlikely that they will shed their premiumization strategy.

India enjoys the No. 2 status in mobile connectivity with a subscription base of 1176 million during the 2016–2020 period. It has had a meteoric rise since 1996–2000, when India was ranked 17th. The gap between No. 1 and No. 2 is narrow as the subscription base of China at No. 1 is 1764 million.

Mobile phone penetration also touched 90 percent, 87.3 to be precise, during 2016–2020 in India.

A study by Anand Rathi says that over 80 percent of the Indian households now have mobile connectivity, even after factoring in multiple SIMs card used by a large section of the population. The room for adding more subscribers is shrinking and, therefore, premiumization of tariff is only one of the few viable options before telcos.

With the pandemic receding, and work from home systems declining, the falling subscriber base is a worrying trend. TRAI performance indicators data reveals that the subscriber base was 1169.46 million in January 2022, from 1178.41 million in the previous month. Bharti Airtel was the sole player to add subscribers in January, with a net addition of 0.7 million users. Reliance Jio, Vodafone, and the PSU twins had lost subscribers.

In December 2021, the telecom user base had declined by 12.8 million, dragged down by Reliance Jio, which lost 12.9 million subscribers. Vodafone had lost 1.6 million customers while Bharti Airtel had added 0.475 million users in that month.

SIM consolidation is held responsible for the decline in subscriber base for the second straight month. According to ICICI Securities, SIM consolidation is likely to continue to hurt the telcos.

Nomura Financial Advisory and Securities agrees. The impact of SIM consolidation among lower rung of subscribers, following the sharp tariff hikes, is likely to keep industry’s net additions subdued in the near term.

Besides, high cost of handset prices and higher tariff have also slowed down the addition of 4G subscribers.

BWR says around 44 percent of the subscribers are from rural areas and, therefore, price hikes could discourage the increased usage of the telecom services.

Even as the operators are consistently improving their operating and financial metrics, the industry is in a transition phase as telcos are gearing up for the 5G play that requires massive investment in the spectrum.

BWR expects the EBITDA margins of telecom operators to improve further in FY23 owing to the expectation of another tariff hike, coupled with the successful and timely roll-out of 5G.

The launch of the 5G network in FY23 would result in some of the subscribers shifting from 4G to 5G network, thereby improving ARPUs, and operating margins.

While tariff hikes, higher data consumption, and relief package on AGR payment have all helped improve the operating metrics of the industry, there is a consensus that the next wave of growth will come from non-telco businesses, comprising enterprise business, cloud services, and digital and fixed broadband services.

More partnerships on the lines of Google-Airtel and Google-Jio tie-ups could also be on the anvil that accelerate the cloud ecosystem for enterprises, particularly the small and medium enterprises.

New areas of growth may bring in better value in the longer term. Tariff hikes and premiumization, meanwhile, are set to continue in the
medium term.

And the risk of SIM consolidation remains.