In Short:
The telecom sector is planning to increase tariffs to boost average revenue per user (ARPU), which is currently low globally. Tariff hikes of up to 25% are expected to increase ARPU from around Rs 200 to Rs 300 by FY26. Analysts believe multiple rounds of tariff increases are necessary for the industry to reach Rs 300 ARPU level. Tariff repair is crucial for profitability and return on capital employed.
The telecom sector will need to implement a few rounds of tariff increases to witness a significant enhancement in average revenue per user (ARPU), which currently ranks among the lowest globally.
Factors contributing to ARPU growth:
Upwards tariff revisions up to 25%
Consumers transitioning from feature phones to smartphones
Switching from prepaid to postpaid services
Increasing expenditure on data monetization
Despite high capital expenditure incurred by telecom players including Reliance Jio and Bharti Airtel to launch 5G services in 2022, the tariffs have remained unchanged. Mobile tariffs were raised by around 20% in December 2021. Vodafone Idea will soon launch 5G services after a successful fund raise by FPO (follow-on public offer).
“It will take a couple of rounds for ARPU to increase from around Rs 200 to Rs 300. One round of tariff hike is expected by FY25 that can help ARPU reach Rs 270 by FY26E,” according to analysts from Emkay. IIFL Securities analysts state that it will take at least two rounds of tariff hikes for the telecom industry to reach an ARPU level of Rs 300, with Indian ARPU still among the lowest globally.
Post elections, another round of tariff increase may happen in FY27 to achieve a Rs 300 ARPU, compared to Rs 209 in 4QFY24. ARPU is a key metric for profitability.
In the last quarterly results for March 2024, Reliance Jio reported an ARPU of Rs 181.7, Airtel at Rs 208, and Vodafone Idea at Rs 146.
“Even at this ARPU, our return on capital employed continues to be low at 9.4%. To ensure industry health, tariff repair is extremely critical,” said Gopal Vittal, MD of Bharti Airtel.
Analysts highlight that the low return ratio (ROCE) of 9.5% for the telecom industry calls for significant tariff repair, indicating the need for a tariff increase.
Although monetizing 5G has been challenging for the top two telecom players, it has eliminated the need for further 4G capacity investments. Experts suggest that tariff hikes will be the next step, with only a slight reduction in the number of SIM cards expected following the hike.
As 5G technology matures, consumer demand grows, and new use cases emerge, the industry will gradually see returns on its investments. In the meantime, increasing tariffs will be the most effective strategy.
