MENU

Published on 9/01/2018 3:58:53 PM | Source: Motilal Oswal Securities Ltd

Telecom - RJio alters pricing in a surprise move - Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Telecom Sector #Motilal Oswal #Reliance Jio #Sector Report

RJio alters pricing in a surprise move

This could prolong industry ARPU recovery

* Reliance Jio (RJio) has cut ARPU by 10-25% (INR50-60) for its four popular plans, in a move that could potentially reverse the past-nine-month trend of ARPU accretion. The price cuts come as a negative surprise, especially as RJio seemed to have shifted focus on profitability with the launch of two ARPU-accretive plans recently.

* The move, in our view, could be an attempt to eat into the subscriber market shares of smaller operators (Tata Tele, Telenor, RCom, Sistema) before they merge/consolidate over the next six months.

* Larger players Bharti and Vodafone’s popular price plans are at a meager 11-15% premium to RJio, while Idea’s plans are at ~23% premium. We believe Bharti and Idea’s data subscriber ARPUs may be 25-30% below their popular price plans, which limits the risk of downtrading – consumers will have little incentives in shifting to RJio’s lower-priced plans. Our FY19 estimates for Bharti/Idea build in flat ARPU growth, and thus, the scope to revise estimates is limited.

* This move by RJio could prolong the period of hyper competition. However, we expect rationality to prevail in the industry over the next 2-3 quarters, as Bharti and Vodafone-Idea should have steady data capacity and FCF, forcing them to drive growth through ARPU accretion instead of undercutting each other. We maintain our positive stance on Bharti and Idea.

RJio cuts ARPU by 10-25% – a negative surprise

In a move that could potentially reverse the ARPU accretion trend (4-5 price hikes taken over the last nine months), RJio (according to media reports) cut ARPU by 10- 25% (INR50-60) for its four most popular price plans – INR149/28 days, INR349/70 days, INR399/84days and INR449/91days. The move has negatively surprised us, given that i) it had launched two new price plans – INR199 and INR299 (28 days validity) – last week, with 30% higher ARPUs and ii) management has been indicating about ARPU accretion to improve profitability.

Intention may be to chase subscriber base of smaller operators

We believe the move is intended to eat into the subscriber market share of small vulnerable players like i) Tata Tele and Telenor before they merge with Bharti and ii) RCom and Sistema as they plan to shut operations over the coming 6-9 months. Given that most of subscribers with smaller operators are deal-hunters with low ARPU of INR100-120, RJio may plan to attract them before they shift to Bharti and Idea.

Bharti-Vodafone price plans at 11-15% premium to RJio

Over the past month, large peers like Bharti and Vodafone have launched price plans offering unlimited voice and 1GB/day data for 80-90 days at INR450-500, which is at 11-15% premium to RJio. On the other hand, Idea’s price plans are at ~23% premium. In terms of network experience too, Bharti has healthy data network and should be able to match RJio’s data capacity. Vodafone and Idea too, albeit currently focused on the merger, may reach healthy data network over the next 6-9 months. This should allow these large operators to compete with RJio in order to protect their market shares. Smaller operators, on the other hand, have limited wherewithal to match RJio’s ARPUs and data experience.

Bharti/Idea estimates build in limited ARPU recovery

Bharti/Idea’s 3QFY18 ARPU is estimated at INR127/INR116, with ~25% data subscribers and average data subscriber ARPU of INR200/INR175 (implying 25-30% higher data ARPU compared to their popular price plans). Given this, consumers, in our view, will have limited incentives in revising their price plans, and thus, the risk of downtrading is limited. We are building in flat ARPU growth for Bharti/Idea to INR138/INR125 for FY19. Flat ARPU growth for the larger players could prolong industry ARPU recovery, in our view. The move by RJio could lead us to revise our ARPU estimates of 15%/10% growth for 4QFY18/FY19. However, before making any changes to our estimates, we would await management commentary in 3QFY18 results.

Expect prolonged phase of hyper competition, but rationality may prevail

The move by RJio could prolong industry ARPU recovery. However, we also note that the scope of ARPU downtrading is limited from current levels. RJio was able to take subscriber market share from smaller players via intensive price competition over the last 12 months. Over the next 6-9 months, Vodafone-Idea combined entity’s increased data capacity and FCF (through synergy), and Bharti’s completion of aggressive network capex should create three strong players in the industry. We believe this may force each player to drive growth through ARPU accretion instead of undercutting. We maintain our positive stance on Bharti and Idea.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd  Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer