Tariff war: New telcos to face tough times
Mkt Veterans Recall Damaging ’03 FMCG Price War Partha Sinha & Namrata Singh | TNN Mumbai: The tariff war among telcos is taking a heavy toll on their stocks, with sector leaders losing the most on the bourses. Last week, while telecom major Bharti Airtel lost 21% to Rs 343, its close competitor Reliance Communications lost 22% to Rs 249. And investors in the top five listed telecom companies were poorer by nearly Rs 54,000 crore last week. Brokers and analysts expect the new tariff plans — that aims at a ‘market-share-at-any-cost' type of approach to business — to dent the revenues of the telecom majors by about 10-15% annually although the companies differ. Analysts also feel that in this lower-rate regime, all new entrants into the telecom space will now find it harder to attract customers and end up with lower revenues per minute. Market veterans are now drawing parallels to the price war that two of the leading FMCG companies had resorted to a few years ago. Between 2003 and 2004, a price war to gain market share had broken out between the two traditional rivals — Hindustan Unilever (then HLL) and Procter & Gamble — in the detergents market. First, it was HLL which reduced the price of Surf Excel in 2003. This further widened the gap in pricing between Surf Excel and P&G's Ariel. In March 2004, P&G retaliated by cutting the prices of Ariel and Tide. HLL followed suit and reduced the price of Surf Excel further and matched Ariel. While revenue and profit of HUL suffered during that period, P&G's figures were not made public since its laundry business was housed in its unlisted Indian subsidiary, P&G Home Products. As investors took a grim view of HUL's business, in August 2004 the stock nearly traded in double-digits, more than 50% off from its peak value that year at Rs 216. At that time, HLL had a market share of 40%. Its plan of action on pricing was described as a logical marketing strategy for the long term. The logic was to strategically drop prices of Surf Excel so as to widen the net for the mass consumer. The idea was to upgrade the mass-end consumer into using Surf Excel. P&G, which had a relatively smaller share of around 4%, had little to lose. However, the strategy was later discarded as value growth started to erode. Subsequently, in 2005-06, just when the commodity cycle was on an upswing, both players went back on the usual value-led growth by taking judicious price increases to boost sales growth. This ushered in the era of price-led growth in the FMCG sector. In the backdrop of the current telecom tariff war, analysts are now taking a bearish view of the stocks. Foreign broking major Morgan Stanley recently noted that RCom's tariff could ‘‘possibly stagnate industry revenue growth for the next 12 months.'' With aggressive pricing becoming the industry norm, and at the same time competition increasing ‘‘investors could start de-rating the Indian telecom sector,'' it noted. One analyst termed it ‘‘hyper-competition''. They feel losses for firms could be higher and duration of competition longer since there are about 10 operators, listed and unlisted, who could start tariff war if pushed by new entrants or existing competitors. * SPLIT SECONDS ** Tata DoCoMo | *Pay-per-second pulse and pay-per-character SMS on GSM network and pay-per-call with unlimited no. of minutes on CDMA network * Bharti Airtel | *50 paisa/minute for both local and STD calls on its network * Vodafone | *STD at Re 1/minute * Aircel | *Pay-per-second plan * Sistema Shyam | *To launch its Delhi operation with pay-per-second plan * BSNL | *1 paisa/second for local calls and 2 paise/second for STD * RCom | *50 paise/call & SMS for services in India --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
