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Business News/ Market / Mark-to-market/  Incumbent telecom companies enjoy the best of both worlds
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Incumbent telecom companies enjoy the best of both worlds

While tariffs have reached levels where firms can earn a decent profit, but at the same time are at sub-optimal levels from the perspective of competitors

Getting carried away with tariff increases could turn counter-productive in the future if Reliance Jio Infocomm starts operations at price levels that are far lower than prevailing rates. Photo: MintPremium
Getting carried away with tariff increases could turn counter-productive in the future if Reliance Jio Infocomm starts operations at price levels that are far lower than prevailing rates. Photo: Mint

The average price realizations of Indian telcos have followed a curious path this year. In 2013, incumbent companies such as Bharti Airtel Ltd and Idea Cellular Ltd had reported a decent increase in realizations. Thanks to the drop in competitive intensity, these companies were able to increase tariffs.

But this year, two of the top three companies, Idea and Vodafone India Ltd, reported a decline in realizations in the voice segment, according to data collated by Kotak Institutional Equities. Bharti Airtel’s average voice revenue per minute rose, but by only 1.3%.

This flies in the face of most analysts’ estimates that realizations would continue to rise in 2014. Why have tariffs stopped rising if the intensity of competition hasn’t changed much this year?

Analysts at Kotak suggest that if tariffs had continued to rise, it would end up easing financial pressure on smaller companies. With their far smaller operations, the only way they can be profitable is when tariffs rise meaningfully from current levels. The analysts wrote in a note to clients that one of the objectives of incumbent companies, as far as pricing strategy goes, is to “keep challengers under pressure to ensure that the industry moves towards a more ‘normal’ competitive structure. Now, voice RPM (revenue per minute) increases ease the pressure on the challengers a tad and hence are counterproductive as far as achieving this objective is concerned."

What’s more, although tariffs haven’t risen this year, these companies have managed decent growth in profit, on the back of volume growth in both the voice and data segments, as well as cost cuts. Earnings before interest, taxes, depreciation and amortization of Bharti Airtel and Idea Cellular rose by an impressive 22.6% and 25.9%, respectively in the September quarter.

Incumbents, therefore, seem to be enjoying the best of both worlds; tariffs have reached levels where they can earn a decent profit, but at the same time are at sub-optimal levels from the perspective of competitors.

Besides, getting carried away with tariff increases could turn counter-productive in the future if Reliance Jio Infocomm Ltd starts operations at price levels that are far lower than prevailing rates. Of course, the possibility of price competition at the time of Reliance Jio’s entry cannot be ruled out; although if incumbents choose to keep tariffs at current levels, the scope for price competition gets curtailed to a large extent.

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Published: 26 Nov 2014, 07:22 PM IST
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