Are rivals isolating RCom on tariff hike?

New Delhi: Is Reliance Communications being isolated by competitors on tariff hike?

An agency report said Idea Cellular has ruled out any immediate increase in tariffs, saying it keeps revising its tariffs on a circle to circle basis.

Other biggies such as Bharti and Vodafone have also kept mum on the issue though some media reports suggested earlier that the management of Bharti Airtel is evaluating its course of action on tariffs. RCom raised call rates last Friday by a steep 25 percent to 1.5 paise per second from 1.2 paise.

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Will competitors follow suit, even if they are saying no now, by selective price increases in some areas? An official of a leading telco pointed out that competitive intensity was waning now as telcos are gearing up for large payments for upcoming auctions and there was still some reason to believe that RCom’s competitors will do selective tariff hikes but would not publicise these measures.

But in a note to clients immediately after RCom’s tariff hike last week, Citi Equities Research analysts Gaurav Malhotra and Arthur Pineda said that the likelihood of a sharp tariff hike by the GSM incumbents is low, despite emerging signs of competitive easing across the industry.

“In our view, their first step to improve realisation is likely to come in the form of lowering of the existing tariff discounting.

This will be under the radar and relatively easy to pass-on.” Sachin Salgaonkar, Paras Mehta, Swosti Chatterjee and Piyush Mubayi of Goldman Sachs noted that while operators like Idea have recently increased tariffs in select circles like MP, “RCom’s increase is steeper and applicable for a wider subscriber base.

While operators like Idea have increased tariffs only for existing subscribers (when current package expires), RCom has increased tariffs for existing subscribers as well as new subscribers. While we consider increase in tariffs as the right step going forward, we remain skeptical on whether RCom’s strategy would help it increase its revenues …. if operators like Bharti/Vodafone do not follow this move, we see risks of further decline in revenue market share for RCom.”

HSBC Global Research analysts Raji Sharma, Tucker Grinnan and Upasna Agarwal said that given RCom’s poor quality subscriber base (active subscriber base is about 76 percent versus about 90 percent for Bharti, Idea and Vodafone) “we think it will be difficult to sustain the hike.”

They also noted that although RCom is a No: 3 player in Bihar, HP and MP, it is a laggard in almost all other circles.

“Replicating the hike across India could prove to be difficult if competitors do not follow suit. The sustenance of hikes across operators primarily depends on market leader Bharti,” they added. Rising cost of diesel-which is used to run telecom towers - and the steep increase of the base price for spectrum which the government has proposed for upcoming auctions are two of the main reasons for rising phone tariffs and days of one paisa tariffs are over!

RCom has already implemented the hike in four circles-Himachal Pradesh, Madhya Pradesh, Gujarat and Bihar and a pan-India increase would take another 30 days to get effected. RCom’s decision to go for the kill follows Idea Cellular’s bold gambit.

It has already increased tariffs across three schemes (Rs 90, Rs 68 and Rs 37) in MP where it has either reduced talktime or raised tariffs on its per-second plans to 1.2p/2sec from 1p/2sec earlier. In addition, it has also reduced the recharge validity by 17 percent, according to Citi’s Malhotra and Pineda. Speaking to Firstpost earlier, a Tata Teleservices spokesperson had said there was “nothing as of now” on tariff hikes.

A story in the Economic Times on RCom tariff hike quoted an industry official as saying that the rate increase would result in 7-8% rise in revenue by the time its full impact is realised. About 35 percent of the incremental revenue would flow to operating profit, he added.