Reliance Jio travels first-class on the tariff hike gravy train

As recently as a month ago, the future of two of India’s three remaining private telecom players—Vodafone Idea Limited (VIL) and Bharti Airtel—was in doubt. Slapped with retrospective payments of Rs 53,000 crore (~$7.3 billion) and Rs 35,500 crore (~$4.8 billion), respectively, by the Supreme Court—in line with a broader definition of what constituted taxable revenues—VIL and Airtel were living on borrowed time. The only winner in all of this was Reliance Jio, which is owned by the richest man in Asia, Mukesh Ambani.

Unlike its competitors, Jio was hit with a much smaller payment. Around Rs 60 crore ($8.3 million), since it only came into existence in September 2016. Already the undisputed market leader in terms of revenue despite being a relative infant in the space, Jio stared at one of two favourable outcomes:

1) A virtual monopoly if both VIL and Airtel collapsed.

2) A duopoly with Airtel if VIL, hit hardest by the retrospective dues and already heavily loss-making, failed.

Neither of those happened. Instead, the government intervened.

While the SC-mandated payments weren’t scrapped or deferred, the government gave ailing telcos a lifeline. It put a two-year moratorium on spectrum-related payments—essentially, temporary relief amounting to Rs 42,000 crore (~$5.8 billion) for the beleaguered telecom space.

Buoyed by the reprieve and needing to turn things around, both VIL and Airtel acted swiftly. They announced they would increase tariffs as of 2 December. At the time, telecom tariffs in India were the lowest in the world. Reliance Jio has also followed suit by announcing tariff hikes of its own.

The increased tariffs will be a huge boost to the financials of all three telcos. It is imperative to increase tariff rates by 10-20% for operators to survive, industry and government officials said unanimously.

Overall, the tariff hikes will boost the industry’s annual revenue and EBITDA (earnings before interest, tax, depreciation and amortisation) by Rs 53,000 crore (~$7.3 billion) and Rs 42,000 crore (~$5.8 billion), respectively, according to Emkay Global Financial Services.

While all of this may seem like a win for VIL and Airtel, who have a chance to turn their fortunes around, Jio remains the biggest winner. Because while it has benefited immensely from low tariffs—it crashed industry tariffs with its cut-throat pricing to gain users since its launch in 2016—it needed this increase. Badly.

According to a senior analyst and sources close to the company’s management, the prevailing tariffs before the hikes were virtually unsustainable. 

“Operators announcing tariff hikes signals that price power is back in the market,”


“No operator can survive on these (previous) tariffs,” said a former senior official with Trai, India’s telecom regulator. “Irrespective of what Jio states in its balance sheet, the operator is not making a profit from telecom revenues,” he added. 

The added revenue is vital to helping Jio maintain the quality of its networks. According to the former TRAI official, Jio will require capital expenditure (capex) to the tune of 20-30% of its initial investment on networks just to maintain its 2017 levels of service. In August, Mukesh Ambani stated that $50 billion has already been pumped into Jio.

But the good news for Jio goes beyond just shoring up its financials and network. It also takes the company a step closer to an initial public offering, or IPO.

It’s what you’re made of

While telecom’s rising tide will raise all boats, Jio’s boat is expected to rise the highest. At the heart of Jio’s expected surge is the fact that not only does it have more customers, but it has the right type, too.

Both VIL and Airtel haven’t extended the tariff hikes to postpaid users since postpaid rates are markedly higher than prepaid rates anyway. This diminishes their gains from the tariff hike since earnings from postpaid users account for around 25% of their respective revenues. The overwhelming majority of Jio’s users—some 95%—on the other hand, are prepaid users.

In addition, all of Jio’s 355 million customers are 4G users. This is unlike VIL and Airtel, which have a significant 2G user base. For perspective, While VIL has 90.3 million 4G users, Airtel has 95 million. Jio, therefore, has more 4G subscribers than both its rivals combined.

This customer skew is critical—the tariff hikes will predominantly boost the average revenue per user (ARPU) among 4G customers. This is because 2G users already pay for voice calling services anyway, while calling on 4G has been virtually free. Crucially, 4G users are also better able to absorb the tariff hikes.

Jio’s comparative advantage here is evident from the predicted average revenue per user (ARPU) spikes forecast by analysts. Assuming a 70% increase in tariffs from current levels in three years, one analyst with a leading brokerage firm predicts that VIL will see ARPU go from Rs 107 ($1.49) at present to Rs 170 ($2.37) in that time.

In the same three-year period, Jio’s ARPU is expected to jump from the present Rs 120 ($1.67) to Rs 204 ($2.8). For Jio, this translates into annualised revenue of Rs 84,000 crore (~$11.7 billion) from the current Rs 41,000 crore (~$5.7 billion), the analyst said, requesting anonymity as he wasn’t authorised to speak with the media.

Let’s get listed

According to the analyst quoted above, these tariff hikes will hardly be the last we see. There will be multiple such revisions over the next 2-3 years. If the market share remains constant, the analyst says, each provider’s ARPU will rise by around 70%, in line with the overall tariff increase projected.

But here’s the thing, Jio isn’t content with maintaining the status quo.

According to sources close to Jio’s management, its short- to mid-term target is to achieve 45-50% of revenue market share (RMS). This is up from the 31.7% share it currently enjoys, a figure that already makes it the market leader ahead of Airtel. In addition, it wants to get to a monthly ARPU of Rs 160-170 ($2.23-2.37) . It hopes to meet both goals by 2022, with its upcoming tariff hike—scheduled for 6 December—an important step in this direction.

This combination of ARPU and RMS is seen as key to Jio’s dominance going forward. For one, says a Mumbai-based analyst, a 45% RMS would likely pose a serious threat to VIL’s survival. More importantly, though, this ARPU-RMS mix would see Jio on the verge of its ultimate ambition—an IPO.

It would give Jio a return on capital of 12%, say analysts. Combined with a positive cash flow zone, it would be attractive enough for public investors. “It will be a very successful IPO,” said a highly placed source who works closely with Jio.

The windfall accruing from a potential IPO will be crucial to Jio’s ability to continue onboarding users at a steady clip. According to data from Trai, Jio gained 8.4 million users in August alone. This, even as both Airtel and VIL bled users—the latter lost almost 5 million users in August.

Reliance Jio solves for the future

Various industry sources say that Jio will continue to add users despite hiking tariffs because it can afford to raise tariffs less than its rivals. According to one report, Jio’s plans will likely remain 20% cheaper than those of its rivals even after it increases tariffs.

However, even as Jio continues adding subscribers to its network, the overall quality of its network is choking under the burden. According to wireless-coverage mapping company OpenSignal, Jio’s data speeds pale in comparison to those of its competitors as users compete with each other for bandwidth. Given its target to reach 500 million users by mid-2020, these problems will only amplify.

To maintain or improve its quality of service—things like data speeds, avoiding call drops, etc.—it will need to invest heavily in network equipment, base tower stations (BTS), and the like. Already, Jio has 7,46,000 BTS. This will require substantial investment. Jio, though, is primed and ready.

It has cleared the lion’s share of its debt by transferring it to its parent entity, Reliance Industries Limited. It has also hived off its tower and fibre assets into infrastructure investment trusts. Reliance Jio will continue to invest funds into its network and future spectrum auctions, according to sources.

Further aiding Jio in its quest to telecom dominance are the actions of its rivals. After practically engineering the current bloodbath in the sector with its bargain-basement pricing, it lowered prices so they would bleed revenue in their quest to compete. Now, any relief they secure from the government will benefit it as much as anyone. Like with the recently announced spectrum payment moratorium. While Jio wasn’t sweating on it, not having to make these payments a while longer allows it to invest more into its network.

“Reliance Jio ensured that incumbents’ interests are aligned with its own,” says the Mumbai-based analyst. He sums up its approach: “If you want to win, I will win bigger.”

Edited by Ranjan Crasta.

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