Bharti Airtel To Look At Raising Headline Call Rates

NEW DELHI: Bharti Airtel could raise basic call rates for the first time in five years as it battles increasing input costs, a move that would make it the second major telco to do so after Reliance Communications raised them for prepaid users last month.

On the back of a robust earnings performance by Bharti in the March quarter, this would strengthen the notion that the telecom industry is on firmer financial footing after a damaging tariff war in 2009-11.

Analysts, however, said that while India's largest telco needs to raise call tariffs to improve its financial health, the scope of the increase could be limited as its two top rivals - No. 3 Idea Cellular and No. 2 Vodafone India - have clearly said they won't touch the basic rate, or the call rate without discounts, and are happy just cutting freebies offered to users.

"The fact is that these levels of voice pricing are absolutely unsustainable" with inputs costs going up, including those for rolling out networks, optical fibre, spectrum and diesel, Bharti Airtel's CEO for India and South Asia Gopal Vittal told reporters at a press conference. Diesel is needed to run generators at mobile tower sites.
"We have hitherto avoided taking headline tariffs (up) but at some point there may be an opportunity to raise headline tariffs," he said, adding however that the priority for the company remained reducing discounted minutes.

Phone bills for postpaid users typically comprise basic call charges, also called headline rates, on which discounts such as free minutes are given to users based on their tariff plans. Prepaid users, who still make up over 95% of the mobile phone user base, typically get discount vouchers for a specific time period.

By decreasing validity on prepaid vouchers, carriers force customers to use up talk time faster. By increasing headline voice tariffs, the minimum charge for a call paid by both prepaid and postpaid customers will rise.

Higher rates allow operators to increase cash flow, thus allowing investments into improving networks and expanding operations.

Several telcos have been quietly cutting discounts over the past three or four quarters, but have been leaving the basic rate untouched for fear of losing subscribers to competitors or smaller operators that offer cheaper tariff plans. However, the fourth-ranked Reliance Communications raised its headline tariffs in mid-April for prepaid customers by up to 20%, although it left postpaid headline rates untouched.

Vittal's comments came a day after India's largest mobile phone company announced strong fourth-quarter results. Net profit jumped 89% from a year earlier on a 13.5% growth in revenue.

While key parameters such as average revenue per user grew, the average realised rate from calls has been largely flat in the past two quarters, a trend seen in the Idea results as well, leaving some worried.
Analysts explained that while telcos, especially the major players, had been cutting discounts in circles where they are the leaders or the No. 2, they are loath to do the same, or have in fact given additional discounts, in areas where they aren't strong in a bid to attract or retain subscribers. Thus, the net effect on overall realised rates has been somewhat neutral to slightly lower in recent times.

Realised rate is what a telco actually gets after all discounts and associated costs.

Idea cut discounts last year, but this year in its weaker circles has once again leveraged pricing to acquire customers, CEO Himanshu Kapania said, due to which the overall realised rate was down by 2.5% across the country.

"Over time we expect to fix that," he said, but ruled out raising basic rates.

A Mumbai-based analyst said Bharti will be keeping a close eye on moves by Idea and Vodafone in the event of any move on headline rates.

Vodafone declined comment but has said previously that it will work on discounts, without touching basic rates.

To be sure, given that the industry seems to have put the tariff war behind it and is stabilising, the top telcos will eventually want to go ahead with increasing headline tariffs later this year, analysts said.

The situation could change dramatically if Mukesh Ambani-owned Reliance Jio Infocomm enters the industry with a disruptive pricing offer. It's expected to launch voice and data services later this year.

As things stand, "It's more of a do or die situation (for carriers) because this is the only industry which has seen the continuous downward movement of tariffs to a level that a per-minute call is cheaper than a glass of water," said Prashant Singhal, national telecom leader at Ernst & Young.

He expects headline tariffs to be higher by 15-20% by May 2015, though the increase would be gradual. "If headline tariffs are close to 60 paise per minute, the realised rate is around 30 paise, which is not sustainable," given the rising cost of operations.

Bharti's strategy going forward is clear. It will focus on stripping out low revenue generating users, bringing in more postpaid customers who generate higher revenue and improve voice realisations, apart from investing in better data networks and driving cost efficiency, Vittal said.

"With more rational competition, fewer competitors and rising data volume, I see headline tariffs going up marginally. I don't want to give a timeline to it but I don't see a reason why companies need to wait for a couple of quarters (to raise headline tariffs)," said Jaideep Ghosh, head of telecoms practice at KPMG.

Uninor, the Indian unit of Norway's Telenor, said it will take note of any changes in industry tariffs and take appropriate steps if needed.

UBS believes Bharti Airtel's stock could be re-rated significantly over the next 12 months if mobile voice rates continue to go up, data consumption and revenue rises thanks to cheaper smartphones and the "regulatory outlook continues to improve".