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Event update: Telecom - Aggressive pricing of Jiophone elongates the price war

Jio launches Rs49 ARPU plan for Jiophones

Reliance Jio has launched a lowest price plan at Rs. 49, for 28 days validity, offering 1 GB data with voice free. This offer is specially launched to amplify the sale of Jio feature phone. Jio has also launched affordable data add-ons at Rs 11, 21, 51 and 101. Users have to purchase the Jio handset for Rs1500, refundable after 3 years. The value proposition is strong (40% lower ARPU than industry feature phone) without building in the amortisation cost of the phone. However based on our analysis the ARPU differential diminishes to mere 8% if we build in the cost of ownership of the phone.

Jio’s push to keep up sub additions

Jio in their analyst meet had highlighted re-introduction of feature phones after supply issues they faced in Q3FY18. We believe that Jio has gained a fair share of smartphone market share (160m of 400m) and it needs to tap into the feature phone base to drive further market share gain. However, the capture of feature phone market requires users to purchase new devices (Jiophone) and thus we think that switch might not be easy. Hence the need to incentivise of phone refund and low starting ARPU of Rs49. That said, we think a 3-year refund time frame seems long, as the device needs to be returned in proper working condition.  

Expect the plan to impact blended ARPUs by 12-15% 

We think that this plan address the feature phone (voice only) subscribers and don’t expect smartphone users to downtrade. We estimate that Bharti and Idea’s feature phone ARPUs to be in the range of Rs100-Rs110. While we don’t expect incumbents to match the Jio pricing, we still see reduction in feature phone ARPUs for Bharti and Idea by 18% and 22% respectively. Thus on an aggregate basis this leads to an revenue impact of 12%/15% on Bharti India wireless/ Idea Cellular. We cut Bharti’s Rev/EBITDA estimate by 8.0%/12.2% and 7.9%/9.8% for FY19E and FY20E respectively. Similarly, the cut for Idea’s Rev/EBITDA estimate 14.7%/28.9% and 11.0%/12.6% for FY19E and FY20E respectively. 

Price war elongates, stay with better balance sheets in the sector

Jio continues to remain aggressive with their pricing strategy to gain market share and launch of the feature phone at such price reaffirms this. We see this as their attempt to accelerate the data adoption curve, but clearly this is coming at sizeably lower ARPUs. We believe that mass market incumbents (Idea Cellular) could be more severely impacted as 2G centric sub base has been relatively insulated from smartphone data price wars. Continued price war will certainly weigh on the FY19 performance of the incumbents and will further weaken the financial flexibility of Idea Cellular. We are of the view that these price levels are unsustainable in the long-term, but interim market share defense needs a solid balance sheet. Thus we have maintained our preference for Bharti Airtel (a well-capitalised player) over Idea Cellular. We revise down our target price of Bharti Airtel to Rs515 (Rs575 earlier) and Idea Cellular to Rs77 ( Rs90 earlier) to factor in EBITDA cuts.