“With 5G related ARPU (average revenue per user) uplift likely to be insignificant in near future, 4G prepaid tariff hike remains the most important ARPU lever for telcos. We see higher probability of 4G prepaid tariff hikes in mid-2023,” said brokerage firm IIFL Securities in a report. “Pushing tariff hikes closer to 2024 elections raises the risk of political backlash”.
India last saw prepaid tariff hikes in November 2021.
Considering the telcos have committed large annual payouts on spectrum costs, and are investing in their 5G network rollout, they will need to ensure growth in ARPU, said analysts. While 5G uptake is expected to improve ARPU, it will take a few quarters if not more, and in the meantime, tariff hikes are the more viable option.
“Vi (Vodafone Idea) requires a ~25% tariff hike in the near term to meet upcoming debt repayments and much sharper hikes by 2027 to service GoI dues,” Kotak added.
Additionally, Jio’s parent Reliance Industries (RIL) has indicated the telco may opt for an IPO 18-24 months down the line, which will require improving earnings before interest, tax, depreciation and amortization (Ebitda) and free cash flows, said IIFL analysts .
Even post-paid users may see some hike in plan rates, believe analysts from Kotak, as the contribution of post-paid revenues continues to decrease. “With typically higher affordability, lower churn among post-paid subscribers and shrinking premium to prepaid plans, we believe retail post-paid tariff hikes could be on the cards soon,” the brokerage added.
From nearly 20% pre-Jio (pre-2016), the contribution of post-paid revenue to overall revenue has come down to 10%. This, despite a steady increase in the number of post-paid subs.
“We believe the bulk of increase in post-paid subs base is driven by typically lower ARPU, machine-to-machine (M2M) subs,” said analysts from Kotak.
Industry ARPUs have been driven by prepaid tariff hikes over the past three years. A lack of post-paid base tariff hikes and rising share of M2M users in the post-paid base has meant that post-paid ARPU has seen a sharp decline of 60% when compared to pre-2016. As a result, post-paid’s premium to pre-paid has shrunk from the earlier 5.0-6.0 times to just about 1.5 times now.
Apart from tariff hikes, 2023 is expected to be the year of peak capex for telcos as they continue their 5G rollout plans.
“Jio is targeting to take its 5G unique location count to 200,000 by December 2023. This implies those locations would be two-thirds of its 4G unique locations. Our channel checks suggest Bharti would not be very far behind at 150 thousand 5G unique locations by March 2024,” said IIFL.
Jio’s capex is expected to be around $14 billion (Rs 1.15 lakh crore) as it plans to install 5G radios of both the 700MHz and the 3.5GHz bands on all 200, 000 sites, amounting to a $40,000 (Rs 33 lakh) per site all -in-capex. RIL chairman Mukesh Ambani had announced that Jio will spend Rs 2 trillion ($25 billion) on 5G deployment, of which it has already committed Rs 88,000 crore in the 2022 spectrum auctions.
Airtel’s capex is expected to be around $7billion (Rs 58,000 crore) if it decides to forgo bidding for the 700 MHz frequency in the 2023 telecom spectrum auctions. If it does bid for the low-frequency band, its capex could be as high as $18.6 billion (Rs 1.53 trillion).
Another highlight for the year will be increased data capacities for both Airtel and Jio as they forge ahead with their 5G coverage plans.
“We estimate total capacity of the top two telcos to almost treble to 1,400PB/day by Mar 2024, from ~500PB/day in Sep 2022. This capacity should be adequate for handling traffic requirements for two to three years, especially with handsets likely to be the near-term limiting factor for 5G adoption,” IIFL analysts added.
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