New Reliance Jio postpaid plan rattles Airtel, Idea shares

Mumbai: Shares of Bharti Airtel Ltd and Idea Cellular Ltd fell sharply on Friday, a day after rival Reliance Jio Infocomm Ltd unveiled a new postpaid plan that analysts said was likely to hurt incumbent telecom firms’ business.

Airtel shares fell as much as 7.53% on the BSE during the day before closing at Rs385.70 each, down 6.44%. Idea’s shares dropped as much as 12.94% during the day and ended down 11.83% at Rs51.45 each. The BSE Telecom index fell 4.75%, while the benchmark Sensex closed at 35,535.79 points, up 0.82%.

Reliance Jio on Thursday unveiled a new postpaid plan that offers unlimited domestic voice calls and 25 GB of data, as well as international calling at Rs0.50 per minute, for Rs199 a month. That’s about half the cost of comparable offers from other, older telcos, Jefferies India Pvt. Ltd said in a 10 May note. The brokerage added that it expects the incumbents to cut prices in response, leading to a further decline in average revenue per user, or ARPU.

“We have been concerned on the postpaid revenues for incumbents given the cost to consumers is three times of prepaid. Postpaid, while making up only 7% of top three operators subscribers, contribute over 20% of their revenues,” it said.

Reliance Jio, which launched in September 2016 and sparked off a tariff war, has not had as much of an impact in the postpaid segment as it has in prepaid, as a significant proportion of postpaid connections are corporate accounts, said Kotak Intuitional Equities. However, the Rs199 plan “changes the dynamic; dramatically, as always”, it added.

The brokerage firms said that ARPU will correct if the incumbents try to hold on to these customers, but the impact may not be immediate. “More important is the much lower ISD rates being offered by Jio now versus the Rs8-10/min currently being charged by the incumbents. While ISD outgoing is a very low proportion of industry’s overall voice volumes (less than 0.1% of outgoing volumes), we believe the contribution to industry revenues could be in the 1.5-2% vicinity. This revenue stream can easily get cut by half,” it said in a report on 10 May.

According to Jefferies, postpaid users don’t change operators as often as prepaid users do, and a shift to Reliance Jio would be gradual as 40% of the postpaid customers are corporate, and these would be a key targets.

“Any 10% cut in postpaid prices will lead to 2% cut in overall ARPU. Any 10% cut in postpaid prices will lead to 12%/6% Ebitda (earnings before interest, taxes, depreciation and amortization) hits for Idea and Bharti respectively,” Jefferies said.

Jefferies expects industry ARPU to remain under pressure and cost pressures to also increase. It said that recovery will also be gradual from mid-FY20 as ARPU increases will require investment in both capacity and content.