2015 Spectrum Auction – Mobile Call Tariff Hike Inevitable ?

Mobile Tariff Hike India After the run away success of the 2015 Mega Telecom Spectrum Auction in 800, 900, 1800 and 2100 band, telecom tariff hike has become inevitable for Telecom Operators to expand their Network and maintain their balance sheet in black. Since the incumbents do not have major renewals of the type seen in the past two years, the focus would now shift to operating performance and execution.

Intuitively it would appears tariffs have to firm up over the next 3‐4 quarters; our back of envelope calculations suggests indeed telcos may have to pass on some of the elevated spectrum costs to consumers by hiking call tariffs. For example, for Idea Cellular, just add the upfront payment and assume target net debt/EBIDTA of 3x, company would have to generate 24% incremental EBIDTA in FY17E just to keep net debt/EBIDTA within the above target. Thus we believe, pricing would have to inch up to at least bridge the gap on EBIDTA.

How Much Mobile Call Tariff Hike is Possible ?
After the auctions closed, many eminent industry experts, the telecom minister, and TRAI Chairman made statements on how much increase would be needed in voice tariffs to recover cost of spectrum payouts. There are several approaches possible in determining the same. Ideally it should come to 4 paise / minute or around 8% (if we consider 50 paise / minute as Average Tariff across A-Vo-Id operators who control the Voice market).

In the past two years, voice RPM has already gone up by 2% Cagr for the top three and 1% for the industry. It has briefly spurted, but slowing traffic has caused leaders to pull back frequently. Though cost base has gone up for most telcos, for Telenor, the main discounter, it has not. Nevertheless, Telenor is not present only in 6 circles – in others tariffs should rise based on high spectrum cost.

4% to 5% Hike By Different Means is Possible
In our estimates, anything beyond 5% is unlikely because: 1) some telcos may be tempted to cut rates; 2) telcos do not have any spectrum-linked cash outflow in the next two years (due to staggered payment resulting in next cash payout only in March 2017); 3) Jio’s would launch in 2HFY16; and 4) VoIP is becoming relatively cheaper and pervasive (as smartphone penetration increases). The hike will come in different Ways / Avatars – Reducing Validity of Vouchers from 30 Days to 28 Days, Increase in off-Net by 2 Paise / Minute etc so as to not let the consumer feel the pinch of it, yet Telcos cash registers ring louder πŸ™‚

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