Bharti Airtel Ltd and Vodafone Idea Ltd lost 5-6% in trading on Wednesday after Reliance Jio Infocomm Ltd announced new rate plans for postpaid customers. Shares of Jio’s parent, Reliance Industries Ltd (RIL), rose 1.6%. RIL separately announced a new investment in its Reliance Retail Ventures Ltd. unit.
Jio is new ₹The 399 base plan is priced similarly to Vodafone Idea and is 20% cheaper than Airtel’s current basic postpaid plan. But Jio stepped up the value proposition by offering higher data than Vodafone Idea and more content subscriptions than Airtel in the entry-level package.
But you have to see the great impact that this can have on Airtel and Vodafone Idea.
Note that Jio already has a much cheaper version. ₹199 per month postpaid plan. Still, Jio continues to lag behind in the postpaid business, despite emerging as a large telco in the Indian market. Vodafone Idea and Airtel together have the highest share of postpaid subscribers in India: 71% in fiscal 2020 data compiled by Jefferies India Pvt. Show Ltd.
Customer loyalty in the postpaid business helped incumbents retain a large share of their subscribers, even as the size of the market declined in recent years.
Even then, the headlines can’t take it easy. Postpaid has higher realizations and provides stable income. Lately, this segment of the business has become a focus area for incumbents, especially Airtel.
To protect this business, incumbents will have to step up ancillary services and this will increase costs. “Our back of the envelope calculations (assuming ~ 50% of transaction costs for telcos) suggest that matching the offer to the entire postpaid customer base could result in annual costs ₹1,800-2,500 crore, which is ~ 4.2% and ~ 15.8% of the annualized EBITDA of Airtel and Vodafone Idea, respectively, “said ICICI Direct Research in a note. EBITDA is earnings before depreciation and amortization of the interest tax.
In addition, many fear that renewed aggression from the market leader (Jio) could cause losses in the postpaid mobile business of Airtel and Vodafone Idea.
The impact will be pronounced on Vodafone Idea, whose financial position is already weak and has to deal with rising costs. “In our view, Vodafone Idea’s 23 million postpaid subscribers are likely to move on as the service quality gap widens and Jio’s renewed postpaid offering is the right time to seize this opportunity.” analysts at Jefferies India said in a note.
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