Telcos have had to extend the validity of prepaid customers owing to the lockdown, although the impact is likely to be limited
Reportedly, the government is keen that Vodafone Idea survives, so as to avoid a duopoly in the telecom industry
About two weeks ago, it had seemed like telecom companies were among a rare set of firms which will be immune to any impact from the spread of covid-19.
If anything, earnings were expected to rise, as tariffs had been raised in December, and it seemed like a floor price for data services would be introduced soon.
But now, things don’t look as hunky-dory. Telcos had to extend the validity of prepaid customers owing to the lockdown, although the impact is likely to be limited. More importantly, the expected increase in tariffs for data services is likely to be delayed.
After all, no government would like to be seen as the reason behind the cost increase in services, especially when the economy is headed for a major downturn.
Of course, Bharti Airtel Ltd’s relatively better financial position compared to Vodafone Idea Ltd should help it withstand the delay in market repair better. The company has raised about ₹58,000 crore in the past year, and is well-capitalized.
But a postponement of tariff hikes will make life difficult for Vodafone Idea, which is hanging by a thread. According to reports, the government is keen on the company’s survival, to avoid a duopoly.
And, part of the plan to achieve this is to have a floor price for telecom services.
How the government balances the need to rescue Vodafone Idea with the challenge of raising tariffs at a time when the economy is shrinking remains to be seen.
Meanwhile, at the bottom of the pyramid, the loss of income for daily wage earners can impact recharges and revenue flow in the near term. Bharti Airtel is offering relief by extending the validity of prepaid packs of 80 million low-income subscribers till 17 April.
The company will also credit an additional ₹10 talk time in prepaid accounts of all such users to enable them to make calls.
Vodafone Idea also announced a similar relief.
The extension and additional talk time can hit Bharti Airtel’s revenues and operating earnings by 1-2% in April-June quarter of FY21, showed calculations by Motilal Oswal Financial Services Ltd. On an annualized basis, the impact will be less than 0.5%.
Also, the impact can be more than offset by the increased data usage and upgrades by high-value users. “Increased data consumption should see upgrades in recharge values, thus, mitigating the impact," added the analysts at Motilal Oswal.
In any case, it’s the top end of the pyramid that contributes most to revenues, and their usage is likely to increase, given the increasing trend of work from home.
So, even while the floor price decision may get delayed, telecom revenues may not decline, unlike in many other industries.