BackMark to Market | Idea tariff hikes indicate aggressive price competition easing
The tariff hike in Madhya Pradesh has been selective and applicable on a few prepaid recharge coupons
Premium(Mint)
Mumbai: On the back of news that large telecom companies are taking corrective measures to contain dealer commissions, it has now also emerged that Idea Cellular Ltd has raised tariffs in one of its key areas. The tariff hike in Madhya Pradesh has been selective, applicable on a few prepaid recharge coupons, and ranges from 15-20%.
According to Citigroup Research, “The hike has happened across three schemes ( ₹ 90, ₹ 68 and ₹ 37) in the Madhya Pradesh circle where Idea has either reduced talktime or raised tariffs on its per-second plans to 1.2p per 2 seconds from 1p per 2 seconds earlier." For the ₹ 68 and ₹ 37 recharge coupons, the validity period has been cut from 90 to 75 days.
Analysts at Citigroup said in a note to clients, “Idea’s tariff hike, albeit done selectively in its key circle and only marginally topline accretive, is important as it signals its willingness to reduce aggression… We expect a gradual easing of aggression as all operators are staring at high spectrum-related cash outgo (new entrants in the upcoming auction; incumbents from 2014-15)."
The phase of aggressive price competition appears to be easing. Telecom Regulatory Authority of India’s (Trai) recent subscriber release for the industry showed numbers declined in July. A 12 September report in The Economic Times newspaper said subscribers of the country’s largest GSM operators—Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular—fell for the first time in over a decade in August. The report added that the three GSM operators lost about 5 million customers in August, compared with subscriber additions of 3.16 million in July and 4.42 million in June. Official numbers are still awaited.
Considering that profit margins have been under pressure lately, the drop in subscriber numbers may not be taken negatively by investors. The key, however, is if revenue and profit will continue to grow at a decent pace. If revenue growth is sluggish, the industry’s high fixed cost structure will result in continued pressure on margins. Besides, the industry had flirted with tariff hikes a little over a year ago, but had given up pricing discipline soon. With Reliance’s potential entry, some amount of pressure on tariffs will remain.
So far this month, Bharti’s shares have kept pace with the 6% or so rise in the broad markets, while shares of Idea Cellular have risen by over 15%. Investors seem to believe Idea is better off in the current environment. As analysts at Citigroup put it, “Idea has executed well so far as it straddles its dual role of being incumbent as well as a new entrant."
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