Is Reliance Jio Infocomm Ltd scared of losing out to incumbents or does it just want to hurt them some more by keeping tariffs low? The company’s latest move on tariffs has left analysts scratching their heads. Jio had raised tariffs steadily in 2017, which, in large part, supported a huge rally in shares of Bharti Airtel Ltd and Idea Cellular Ltd since October. 

But hopes about pricing discipline have now been dashed. According to news reports, Jio will drop tariffs effective 9 January. What gives? 

It’s difficult to gauge what’s behind Jio’s strategy. But one thing is clear: incumbents’ struggle with profitability will continue and perhaps even worsen in 2018, with their chief adversary keeping tariffs at extremely low levels. 

Jio’s flagship 84-day plan will now cost Rs399, entirely negating the 15% tariff hike in October. Perhaps it is worried of losing subscribers if it pushes tariffs higher than the Rs399 levels. After all, the increase in tariffs in October to Rs459 was accompanied by a cashback scheme, which effectively meant tariffs didn’t really rise. 

This column pointed out last year that Jio and incumbents have been sharing a somewhat peaceful coexistence in 4G handsets, which typically have slots for two SIMs. Customers can afford two connections as long as tariffs are at affordable levels. If Jio increases tariffs beyond a certain threshold, the practice of keeping two SIMs will become unaffordable for many customers. 

For now, Jio’s tariff moves suggest the threshold seems to be around Rs399 for an 84-day plan or Rs145 for a monthly plan. “Recharge stickiness is important for Jio as it hasn’t yet become the primary incoming number of most of its customers yet. This exposes Jio to the risk of losing subscribers at the next recharge, especially given that incumbents have closed the pricing gap versus Jio quite aggressively in the past few months and continue to enhance their LTE network coverage and capacity", analysts at Kotak Institutional Equities wrote in a note to clients, adding that the above thesis is just a conjecture. 

On the other hand, Jio has led the charts in terms of subscriber additions almost every month, which brings to question its latest pricing move. “Scope for incremental revenue gains from a price cut looks limited, given that Jio already has the lion’s share of the market’s LTE subscribers", say analysts at Kotak. If Jio doesn’t gain by lowering tariffs, what prompted its move? 

Whatever the intent, the obvious conclusion is that tariffs will remain competitive for some more time to come, which means profitability will be depressed and cash burn will be high. This is particularly worrying for Idea Cellular and Vodafone India Ltd, which have high net debt-Ebitda ratios of over 8 times. Ebitda stands for earnings before interest, tax, depreciation and amortisation. 

Jio has also introduced new plans, which protects Arpu (average revenue per user), but with higher data allowances. As such, capex can be expected to remain high. “Higher usage instead of higher yields could be central to raising Arpu over time. Yet, while Reliance’s network can easily take higher traffic for now, it also suggests that capital spend on infrastructure, spectrum and content may remain elevated", analysts at Jefferies India wrote in a note to clients. 

Meanwhile, shares of Idea Cellular and Bharti Airtel had risen by 59% and 33% respectively until last week, largely on the back of hopes about pricing stability and the ongoing consolidation in the industry. With assumptions on tariffs now under question, it isn’t surprising that these stocks corrected sharply on Monday. 

But the biggest beneficiary of gung-ho assumptions about the sector is Reliance Industries Ltd, which now prices in a higher valuation for its telecom subsidiary than the India wireless business of Bharti Airtel. Surprisingly, Reliance shares were trading flat on Monday.

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