Competitive intensity continues to ease and lower gross adds with new verification norms should help rationalize cost. This is a a more positive outlook for the industry and the advantage of incumbents. Competition has started to ease and any resultant uptick in rev/min would benefit Airtel via operating leverage. Our analysis of the tariffs as disclosed on the company Websites suggests that base tariffs have remained largely unchanged; however, promotional outgoing tariffs have been hiked by an
average of ~6%, implying ~3% higher ARPM’s.
Incumbents (Airtel, Idea and Vodafone) have the the network advantage in urban and rural areas. This should help them 1) Manage a lucrative post-paid base in urban areas; and 2) Benefit from lower competitive pressure in rural areas. Low usage elasticity, should prevent any operator undercutting. Most telcos have reduced SAC (~7% of Idea’s topline). Commission for new sub acquisition has been cut ~40%. Some benefit of it was visible in 2Q when Idea’s marketing spend fell 20%.
We believe that this time tariff hikes will be sustainable and be absorbed by the Indian consumers because of three reasons: 1) tariffs have come down significantly in the last few years and provide headroom for a moderate increase; 2) high-single-digit GDP per capita growth allows the end users to absorb this increase without any major impact on the spending pattern; and 3) reduced competition due to the regulatory cost burden.