Airtel’s ARPU improvements to be driven by postpaid subscribers and 5G-powered premiumisation

• Airtel currently has the best ARPU in the Indian telecom sector at ₹193, but it is still significantly lower than the ₹300 the company has said is the minimum ARPU necessary to ensure reasonable return on capital.
  
• Airtel chairman Sunil Bharti Mittal said he hopes for a tariff hike by mid-2023.
  
• Airtel is betting on multiple factors to drive ARPU growth – raising base tariffs in select circles, focussing on increasing postpaid coverage in its top towns, and rising usage of 5G-capable smartphones.
  

A ramp up in postpaid subscribers and 5G-powered premiumisation are expected to drive growth for India’s No. 2 telecom company Bharti Airtel, especially at a time when tariff hikes have not rolled in as expected. Airtel’s continued expansion of 5G services across the country is expected to drive up data usage, leading to premiumisation.

While Airtel started tentatively experimenting by hiking tariffs of its base ₹99 plan offering in select circles in November last year, it has still not increased prices across the board. This has resulted in muted growth in Airtel’s average revenue per user (ARPU), a key metric to understand a telecom company’s performance. In the December quarter, Airtel’s ARPU grew by a meagre 1.6% sequentially.

However, now that 5G is here and Airtel has rolled it out in 108 cities across the country with a target of covering all major cities by the end of this year, analysts expect it to result in a much-needed ARPU boost as data consumption is higher on 5G than 4G.

“We expect robust mobile revenue growth, and ARPU to rise, driven by subscriber migration from 2G to 4G, subscriber migration to higher bucket data plans due to a surge in data usage, gains in high-value postpaid subscribers, and segmented tariff hikes,” said a report by HSBC.

For context, Airtel’s postpaid subscriber base increased to 19 million in Q3 FY23, from 17.6 million in the same period last year. It also added more postpaid subscribers in the December quarter (at 6.53 lakh) than in the previous two quarters combined (at 5.32 lakh).

Here’s what will drive ARPU growth going forward

In an analyst call, Airtel underlined multiple factors that will drive its ARPU growth going forward, including – raising base tariffs in select circles, focussing on increasing postpaid coverage in its top towns, and a fifth of its total subscribers having 5G-capable smartphones by the end of FY24.

According to analysts at HSBC, Airtel hiking the base plan tariff from ₹99 to ₹155 in 17 out of 22 circles is another positive contributor to ARPU growth.

The telco also underlined that the top 150 towns in the country account for 40% of the total industry revenue. To drive its revenue growth, Airtel said it would focus on these towns in terms of expanding its postpaid subscriber base, attracting subscribers with its 5G availability.

According to an analysis by HSBC, postpaid ARPUs stand at 1.6-1.7x that of prepaid, and Airtel’s focus on increasing its postpaid subscriber base augurs well for ARPU growth.

Lastly, Airtel also said that it expects 20% of its subscribers to have 5G-capable devices by the end of March 2024. The telco has a target of reaching 300 cities by then, and analysts expect high data allowances to lure existing subscribers into converting to 5G.

Airtel chairman hints at tariff hike by mid-year

Analysts have been expecting tariff hikes for a few months now but the hikes have been slow to materialise. Now, Airtel chairman Sunil Bharti Mittal has said that a tariff hike is likely by mid-2023.

“Lot of capital has been injected that has made the balance sheet strong but the return on capital of this industry is very low. That needs to change. We are talking of small increments that need to come in the Indian tariff situation. I hope half (by mid) of this year,” Mittal said at the ongoing Mobile World Congress in Barcelona, Spain, responding to a PTI query.

Although Airtel’s ARPU at ₹193 is the best in the industry, it is still significantly lower than the ₹300 the company has said is the minimum ARPU necessary to ensure reasonable return on capital.

Responding to a query on the impact of tariff increase on people at the bottom of the pyramid, Mittal said the hike would be low compared to people’s spending on other things and disagreed that they will be impacted.

"Salaries have gone up, rents have gone (up), except one thing. There is no one complaining. People are consuming 30 GB for almost paying nothing. We don't have more Vodafone type scenarios in the country,” Mittal added, underlining the need for tariff hikes.

Data usage and subscribers on the rise

In its Q3 FY23 earnings, Airtel reported data usage of 20.8GB per user per month during the quarter, increasing from 18.7GB during the same period a year ago – this is a 11% increase year-on-year.

Another shot in the arm for Airtel during the quarter was a healthy addition of data users – the telco reported an increase of 6.4 million data subscribers sequentially and 21.2 million year-on-year.

Airtel’s 4G subscribers as a percentage of its total subscribers also witnessed an improvement in the December quarter, increasing to 65% from 61% a year ago.

The rise in 4G subscribers also reflects in the ARPU growth on a year-on-year basis, which rose to ₹193 in Q3 FY23, from ₹163 in Q3 FY22.

Put together, wider 5G availability, converting existing subscribers to 5G by luring them with higher data allowances, focussing on the top 150 towns and targeting postpaid subscriber growth should help Airtel deliver ARPU improvements.

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