Telcos need to dial up on price hikes; 5G monetization is key

In the December quarter, average revenue per user (Arpu) of Bharti Airtel Ltd, Reliance Jio and Vodafone Idea Ltd were in the range of ₹135-193, up by only about 1-3% sequentially. Airtel noted that an Arpu of ₹300 is necessary for a respectable return on capital employed, which was below 9% in the India business.

But the near-term outlook on tariff hikes is subdued. According to Jefferies India, Jio’s subscriber underperformance and Bharti’s decision to take market share from Jio in rural markets could delay tariff hikes.

The competitive landscape is one of the key reasons for the delay in tariff hike. “Elevated churn in the subscribers within the industry prevents any meaningful price hikes and until the migration slows down and operators reconcile, reluctance to increase tariff rates is likely to continue,” according to Avishek Datta, research analyst at Prabhudas Lilladher.

As such, revenue growth for the companies is expected to moderate in the coming quarters. There is no clarity from the companies’ managements on timeline for hikes. Also, limited 5G use-cases and lack of monetization opportunities in the near term, don’t bode well for Arpu rise. When it comes to 5G, telecom companies are focused on increasing the penetration first and migrating users to 5G from 4G services. “Until that happens, 5G premium monetization is unlikely,” said an analyst requesting anonymity.

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To be sure, Airtel and Jio are likely to improve market share at the expense of Vodafone Idea, although the extent of benefit remains to be seen.

From their respective 52-week highs, Airtel’s shares are down by 11%, and Vodafone Idea’s have fallen by nearly 42%. The government’s reforms would support Vodafone in the near term even as delay in fund-raising remains an overhang. According to JM Financial Institutional Securities, Vodafone Idea needs its Arpu to jump sharply to about ₹380 in FY27 to meet its payment obligations.

Jefferies says the longer-term outlook for tariff hikes has improved with the government taking a 33% stake in Vodafone Idea. However, weak near-term outlook on tariff hikes may well mean upside triggers for the stocks are limited.