Telecom: Thoughts on Jio's latest price cut - Kotak

Thoughts on Jio's latest price cut. A moment of truth every 84 days! That's what Jio faces given that a bulk of its customers haven't given up their incumbents' connection yet. Jio is always exposed to the risk of losing the next recharge. To that extent, we are not sure how to read the latest 'price cut' move by Jio after the last two '84-day interval price moves' were increases. Does it indicate that 'recharge leakage' is running ahead of Jio's threshold? Perhaps. Interestingly, Bharti and Idea have responded to Jio's move within a day; no longer reluctant. Interesting times, as always!

Media reports suggest a price cut by R-Jio; prices of popular plans back to July 2017 levels

Unauthenticated media reports suggest that Jio's latest price move involves – (a) cut in the popular 1 GB/day plans to July 2017 levels, reversing the increase announced in October 2017, and (2) introduction of new 1.5 GB/day plans. Exhibit 1 has the details. We say unauthenticated because we haven't seen a press release from Jio or RIL in this regard yet. The new plans do not show up on Jio's website or the plans section of your scribe's 'my Jio' app, either. That said, Bharti's website shows an increase in the validity of a couple of plans (the erstwhile 70-day and 84-day 1 GB/day plans now carry a validity of 82 days and 91 days, respectively). This, we believe, is an indication that the media reports are perhaps right. Media reports also indicate that Jio's new plans would be effective January 9, 2018; this is exactly an 84-day interval from the date of Jio's last pricing move (October 18, 2017).

Read-through of the move not straight-forward; has 'recharge leakage' for Jio increased?

Even as a simplistic read-through of Jio's move is that this is another 'who's the boss' move from Jio, we would refrain from restricting ourselves to this view. Notice the subtle difference between Jio's moves post the July 2017 price increase and the October 2017 price increase. Jio's October 2017 price increase was preceded by a supposedly 'one-week only' 'triple cashback' offer (link). This offer has since been extended multiple times and continues to run even today. We do not see a reason why Jio should have kept the triple cashback offer running if the recharge momentum was healthy and above whatever threshold Jio has set for recharge stickiness.

Recharge stickiness is important for Jio as it hasn't yet successfully crossed the bridge as far as becoming the primary incoming number of most of its customers yet. This exposes Jio to the risk of losing the next recharge especially given that incumbents have closed the pricing gap versus Jio quite aggressively in the past few months and continue to enhance their LTE network coverage and capacity. A moment of truth for Jio every 84 days, in other words; Jio's response is perhaps an indicator of how the latest moment of truth shaped up. We must note that this thesis of ours is just a conjecture. Our reading of the December 2017 quarter performance of Jio and the incumbents is that Jio's recharge momentum has been fairly strong. Hence, we do not see the rationale behind Jio's latest pricing move. Scope for incremental revenue gains from a price cut looks limited given that Jio already has the lion's share of the market's LTE subscribers.

Interesting immediate response from Bharti and Idea

Incumbents have been slow, reluctant and selective in their response to Jio's pricing moves thus far. This is the first time that the response appears swift. Bharti's response, increase in validity of the two most popular bundled plans, is visible on its website while press reports indicate a similar response from Idea (not visible on their website yet). While clearly ARPU dilutive, the response clearly suggests that incumbents are now a lot more confident of their LTE network. Also, the incumbents increasingly have much less to lose by responding aggressively, we believe. Defend or perish, it is.

Our view on Bharti and Idea remains unchanged; ours is a medium term call and never baked in a straight-line up-move in pricing.

Source : Equity Bulls

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