The move by Reliance Jio, Airtel and Vodafone Idea to hike their tariffs by up to 45 percent will prove to be beneficial for the telecom industry, says the latest CRISIL report. The implemented tariff hikes of up to 50 percent by telecommunication companies have the potential to double the industry’s earnings before interest, tax, depreciation and amortization (EBITDA) next fiscal. This is a structural positive for an industry weighed down by weak cash flows and mounting debt, says the report.
“The crucial part now is pricing discipline and extent of down-trading from current plans to cheaper ones by subscribers. That will determine the kind of net gains that telcos will make in the near-term,” said Sachin Gupta, senior director, CRISIL Ratings.
While Reliance Jio had announced a tariff hike of up to 40 percent, Bharti Airtel and Vodafone Idea announced a tariff hike of up to 42 percent each. Airtel and Vodafone Idea’s tariff hikes have come into place since 3 December 2019, and that of Reliance Jio’s on 6 December 2019.
The revised tariffs will improve the industry’s average revenue per user (ARPU) by about 25% to Rs 145 next fiscal from around Rs 116 in fiscal 2019, according to CRISIL. “And given the high operating leverage of the telecom business, nearly 80% of this incremental revenue will flow straight to EBITDA. Our analysis shows every Re 1 increase in ARPU adds about Rs 1,000 crore to the industry’s EBITDA. With 25% growth in blended ARPU expected, EBITDA could double in fiscal 2021 to about Rs 60,570 crore from Rs 29,450 crore last fiscal,” adds the report.
The decision to increase tariffs were announced by Reliance Jio, Airtel and Vodafone Idea last month in order to tackle the financial stress in the telecom industry, which was acknowledged and agreed upon by all stakeholders. The tariff hikes are a good opportunity for the industry to repair its financials and become sustainable, says CRISIL.