Vodafone Idea's tariff-hike dilemma

India's third-largest service provider, Vodafone Idea, is in a Catch-22 situation. While it's seeing its market share dwindle because of the recent tariff hike, it has little option but to hike tariffs.

At the same time, the telco recently acknowledged that the number of subscribers porting out of their network to BSNL's network has gone up after the tariff hike it announced last month.

"One of the trends that we have seen is port-out to BSNL has generally increased from pre-tariff increase levels, which is a space that we are watching and the reason for that is that they [BSNL] have not increased tariff so there is a fair amount of arbitrage," said Vodafone Idea's CEO, Akshaya Moondra, on the recent earnings call.

However, he remains hopeful that the subscribers who are porting out may soon return. "The customers who are used to a good 4G coverage and experience, probably the current offering of BSNL may not be to that extent. People who may have taken quick action in terms of tariff actions may most likely come back," said Moondra. BSNL has recently launched 4G and the coverage is limited.  

High debt, low ARPU

Last month, Bharti Airtel, Reliance Jio and Vodafone Idea all hiked tariffs across their various packages. According to media reports, Vodafone Idea is not the only one losing subscribers because of tariff increases. Other private telcos are also losing subscribers to BSNL since it is the only telco not to increase tariffs. However, Vodafone Idea might see a bigger impact than the others as it was already losing subscribers before raising prices, partly because of insufficient investment in network upgrades and absence of 5G services.

While Vodafone Idea sees its market share dwindle post-tariff hike, it has little option but to increase rates again. The company is facing a debt of 46.5 billion Indian rupees (US$550 million) and has a payment obligation to the government of INR2.1 trillion ($24.95 billion), taking its total financial liability to INR2.14 trillion ($25.51 billion). This means that a tariff hike is crucial for Vodafone Idea as it needs to increase its average revenue per user (ARPU) to bring down its financial liability.   

"The recent tariff intervention is a step in the right direction for the industry to move towards better return on investment, as also to improve cash generation to support the large investment requirements. However, further tariff rationalization is needed for the industry to fully cover its cost of capital," Moondra said in a press release. Vodafone Idea has an ARPU of INR146 ($1.73) compared to Airtel's ARPU of INR211 ($2.51) and Jio's ARPU of INR181.7 ($2.16).

Interestingly, Vodafone Idea lost 920,000 subscribers in May and its market share came down from 18.7% in April 2024 to 18.6% in May 2024, according to data released by the Telecom Regulatory Authority of India (TRAI). It lost 2.5 million subscribers in total in the April to June quarter this year. The tariff hike is only likely to intensify the loss of subscribers.