• Big opportunity for telcos is to convert roughly 280m 2G subscribers, or about one-third of the total subscriber base, to 4G.
• A sustainable and sizeable ARPU expansion is critical from telcos perspective.
• The business model is shifting from traditional voice-only services to complete digital-offerings.

Dubai: There is a shift happening in the Indian telecom sector and will look different in the next two to three years as operators are offering bundles, including mobility services, B2B services, D2H, OTT platforms and various other digital services.

The business model is shifting from the traditional voice-only services to complete digital-offerings as telecom companies are seeking to ensure greater value creation for its customers, which is the key in the current era to ensure customer acquisition and stickiness.

Abhishek Nigam, Associate Director at India Ratings and Research, said that the big opportunity is to convert the roughly 280 million 2G subscribers, or about one-third of the total subscriber base, to 4G.

As of May, India had 1.14 billion subscribers and out of that, 664 million are broadband subscribers, which translate to 58 per cent of the total subscriber base.

Reliance continues to be the leader in revenue market share and subscriber market share. Bharti Airtel has shown its resilience and maintained its subscriber base and revenue market share while Vodafone has been consistently losing its market share over the last few years.

Nigam said that Reliance Jio subscribers are already on 4G but the other two telcos (Bharti Airtel and Vodafone Idea) have seen 12-14 per cent transition to 4G in the last five quarters.

“The transition is picking up every year. If a customer shifts from 2G to 4G, the ARPU is estimated to go up by Rs60-Rs70. As the transition unfolds in the next few years, the ARPU for the telecom sector can rise between 6-8 per cent,” he said.

Nitin Soni, Senior Director for Asia-Pacific at Fitch Ratings, said that all telcos have raised tariffs, since December 2019, but it is still lower than other regional markets.

Lowest ARPU in the world at $2

“The monthly ARPU by telecom market is lowest at $2 when compared to regional markets. When some regionals were impacted by Covid-19, India was not that much impacted due to the higher tariffs,” he said.

So, he said that there is a structural change in the Indian market and there is an opinion that tariffs will rise eventually and “we believe that there is a scope of between 10-15 per cent increase in tariffs in the next 12 months due to the Vodafone woes. Otherwise, it would be difficult for Bharti and Reliance to survive in this market and invest in new technologies and Capex.”

Moreover, he said that India is in a situation where the tariffs can go higher and looking at the macro standpoint of the telecom sector, India is around $2.6 trillion economy and telecom market is of the size of $28 billion, which converts to one per cent of the GDP and is lowest among the regional markets due to high spectrum prices and world’s lowest ARPU of $2.

The telecom industry in India has consolidated from about 12 players to two large telcos (Bharti Airtel and Reliance Jio) and a weak player (Vodafone Idea) and the government-owned telcos (BSNL and MTNL) with the launch of Reliance Jio in September 2016.

“We feel the industry will further consolidate and Bharti and Reliance will further take over the revenue market share from Vodafone Idea, which is losing about four million to five million subscribers a month,” Soni said.

Priyanka Bansal, a Senior Analyst at India Ratings and Research, said that the market structure will evolve and remains to be seen.

“The market structure needs to be monitored in the next six to nine months to see how the market will pan out and to see if it will be a 3 +1 player or 2.5 + 1 market.  The shift from prepaid to postpaid might take some time and not in the near term,” she said.

Inflexion point

For a sustainable business model, Soni said that telcos need to raise tariffs.

“In the last 10 years, we had continuous clout of competitive intensity but we are now at an inflexion point where tariffs can only go up, given the low current return on capital for most telcos. Even Indonesia and Sri Lanka have a higher return on capital than India,” he said.

Compared to some of the developed telecom markets such as China, Singapore, Korea and Japan, they have a substantially higher return on capital as the spectrum is given at fixed prices by the government, he said.

Soni sees scope for a tariff increase to around Rs300 in the medium term.

Big telcos have launched postpaid plans to attract customers but Jio has launched plans which are 20 per cent lower than Airtel.

Jio’s starting plan of Rs399 offers nearly double data when compared to Vodafone Idea’s Rs399 plan and offers more bundled services such as Netflix, Amazon Prime and Disney+Hotstar VIP.

Nigam said that postpaid subscribers are between 1-7 per cent for various telcos and every time a customer migrates from prepaid to postpaid plan, the ARPU differential is “very high”.

“It is between Rs250 and Rs350 per plan.  If telcos convert five per cent of their prepaid subscriber base to postpaid, ARPUs for telcos will likely to rise between 9-17 per cent.  Having higher postpaid subscribers can help telcos to save on marketing and advertising costs.

AGR liabilities

“The current postpaid subscriber base is only five per cent of the total. Three years back, the total data customer to the total customer base stood at 33 per cent and that number is close to 60 per cent now,” he said.

Moreover, he said that ARPU improvement and further tariff hikes are on the cards since telcos are required to make sizeable payouts in terms of AGR [adjusted gross revenue] liabilities, spectrum purchase, regular revenue share to the government and auction instalments (which start from 2023).

Anupama Arora, Vice-President and Sector Head for Corporate Ratings at ICRA, said that it is unclear whether the next round of tariff hikes would be across the industry or limited to telcos facing AGR payments.

Vodafone Idea got an extension to pay $7.9 billion in government dues from a lump sum to a staggered payment over ten years from a Supreme Court ruling in September.

The court ruled that operators must pay 10 per cent of total AGR dues by March 31, 2021, with the rest to be paid by 2031.

Airtel has already paid $2.45 billion towards its total bill of $6.03 billion, which equates to more than 40 per cent of the total bill, and the operator is seeking more clarity from the government over what was the actual amount to be paid from here on.

Soni said that both Bharti and Vodafone will be selective in renewing some of their spectrum assets when compared to cash-rich Reliance Jio.

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