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With their net debt estimated at Rs 1.15 trillion, the merged entity will not be in much of a position to dole out freebies, says Romita Majumdar.
The upcoming Vodafone India and Idea Cellular merger is unlikely to be accompanied by disruptive pricing (subscriber plans) as the telecom industry, a three-player market that has long been in the throes of price wars, is now seeking to collectively raise revenues.
While the industry is holding its breath to find out what surprises the new Vodafone-Idea brand will spring for subscribers, most analysts are certain that as far as mobile user plans are concerned, the new company will not announce any major freebies.
For one, the companies are already carrying forward a large debt component. Secondly, as pricing is a function of competitive dynamics, telco prices are expected to stabilise given that there will only be three players going forward.
"Both Idea and Vodafone would be focusing largely on getting their brand equity right. They have to reconcile two very distinct subscriber bases and any major change could disbalance their relationships with these subscribers," said a telecom analyst who did not wish to be quoted.
Further, with the net debt estimated at Rs 1,150 billion, the merged entity will not be in much of a position to dole out freebies. Analysts have noted that given Reliance Jio's penchant for slashing prices and extending offers, price war isn't a strategy any of the incumbents are likely to toy with.
Vodafone India and Idea Cellular are awaiting a nod from the National Company Law Tribunal, the last clearance they need before they can register their merged entity -- Vodafone Idea Ltd.
"Industry subs have consolidated towards large telcos but multi-SIM phenomenon remains high. We, therefore, expect average revenue per user (ARPU) to remain subdued for another 6-9 months as customer stickiness will be a challenge in a multi-SIM environment and lead to likely delay in price hikes," noted a UBS report recently.
However, analysts do note that there will be a period of churn when the subscribers are integrated across the new ecosystem. During that phase, for a short period, the company might introduce competitive pricing.
"They can't go to extremely competitive rates for the simple reason that Vodafone consumers identify with a certain price-quality range and they are not likely to disrupt it," noted another leading telco analyst.
"Low broadband net adds and higher churn (5.2 per cent) are attributable to Idea's strategy to not aggressively pursue adoption of unlimited bundled plans in an effort to keep channel costs (subscriber acquisition costs) under check," SBICAP Securities had noted in a report post June quarter results.
The report further noted that Idea's ARPU continued its decline in Jun'18 and was the lowest since FY12. Blended ARPUs of Rs 100 (down 29 per cent YoY) was driven by voice ARPU of Rs 73. The company's continued ability to monetise voice successfully in an industry rapidly shifting to bundled plans remains a concern as the fall in ARPUs led to a 2.9 per cent QoQ decline in revenue.
Vodafone's ARPU declined 3.3 per cent over the last quarter and 27.6 per cent yoy to Rs102/sub/month in the June quarter.
"With the merger approval in place, the ensuing quarter's operating performance, subscriber retention and RMS trend would be the key monitorables. Combined entity would have Rs 260 billion cash after fundraising and sale of towers, and the same would be utilised for capex and interest outgo for FY19," noted a report by Emkay earlier in the month.
Knowing the Idea management, we believe that once revenue repair happens, the company would deliver robust operating leverage. But, the same seems to be some time away at the current juncture, the report said.
