Tariff increase – what is different compared to increases in mid-2011?

Indian Mobile operators raised tariffs in June 2011 which led to an increase in RPM in subsequent quarters. However a tariff war and RPM pressure returned and tariff hikes were not sustained. Many Investors questioned us on how the recent industry actions of lower discounting and raising RPM compared to 2011.

Not only had industry financials deteriorated from 2011, there is the pressure of significant regulatory costs faced by all operators. Industry over capacity is getting addressed as new entrants as well as existing operators (like Tata and Aircel) are shutting cell sites/circles selectively.

Investors are also concerned that the top 3 operators will continue to compete for market share. In our view the top 3 operators, post their slowdown in revenue and EBITDA growth over last 1 year understand that tariff cuts have proved futile. With declining competitive intensity, the industry is well positioned to increase pricing which is essential in view of the increasing cost structure.

Post the two failed auctions in Nov 2012 and Mar 2013, we believe spectrum pricing will decline further. We do not see incumbents losing 900Mhz spectrum and continue to expect monetary solutions where the operator whose spectrum comes up for auction will acquire the spectrum at the reserve price (which is likely to be revised downwards).