Telkom sees 5 trillion rupiah in savings from Indihome-Telkomsel merger; will target higher-value customers

TELECOMS giant Telkom Indonesia expects synergies from the merger between Indihome and Telkomsel will help it save up to five trillion rupiah (S$450.3 million) annually. It also hopes to grow revenue that is more sustainable by focusing on higher-value customers. (*see clarification note)

Telkom chief executive Ririek Adriansyah said 60 to 70 per cent of mobile subscribers have shifted towards using fixed broadband services in their homes and offices.

“It’s pretty obvious that we need to merge in such a way; otherwise we would be investing twice in fixed and mobile, but we’re only getting one revenue,” he said.

Indonesia-listed Telkom last month announced it would merge its fixed broadband arm, Indihome, with Indonesian mobile network operator Telkomsel, as part of its fixed-mobile convergence (FMC) plans.

Telkom owns 65 per cent of Telkomsel while Singapore-listed Singtel owns the remaining 35 per cent. The merger will involve Indihome injecting into Telkomsel and new shares issued to both parties, such that Telkomsel will be 69.9 per cent owned by Telkom and 30.1 per cent owned by Singtel.

A Citi report indicated that company executives hope the merger will drive an uplift to earnings before interest, taxes, depreciation and amortisation of about five trillion rupiah by 2027.

They also expect seven trillion rupiah in savings from capital and operating expenditures, and revenues are expected to increase.

In an interview with The Business Times, Adriansyah said that the merger is a departure from the company’s original strategy – laid out in 2020 – to allow IndiHome and Telkomsel to target certain “zones” in Indonesia with different criteria.

IndiHome has about 9.4 million fixed broadband subscribers. But Adriansyah said it will be more challenging to reach the next 10 million subscribers as they will be spread out over a larger area, which will necessitate greater investments in infrastructure.

Such customers could also have lower incomes, which may impact the average revenue per user (ARPU) generated.

It therefore makes more sense to target these customer segments with cheaper options that do not require an immediate increase in capital expenditure.

“In certain homes, we can use fixed wireless first; and then later on, we transfer them to fibre optic if they meet certain criteria,” he said.

Chief finance and risk officer Heri Supriadi said further savings can come from reducing certain operational and personnel expenses.

“For example, we have around 380 offices across Indonesia for IndiHome. Almost in the same cities, we have Telkomsel (offices). For these offices which serve customers, we can reduce our budget,” he said.

The newly merged entity will aim to increase the stickiness of its subscribers with bundle plans for both fixed broadband and mobile service, but without heavy bundling discounts.

It also expects greater potential for growth in fixed broadband, since only about 15 per cent of households currently use this service.

In particular, Telkom is focused on serving customers who have spent more than 100,000 rupiah per month and have stayed with the company for more than a year. Such customers account for about 50 per cent of the company’s revenue.

Adriansyah said this group would be more likely to subscribe to fixed broadband in their homes. By creating bundles of mobile and fixed broadband services, he hopes to be in a better position to compete with other fixed broadband providers.

Meanwhile, Telkomsel is raising prices and simplifying its product suite in the mobile space – even as it continues to shed revenue market share.

Supriadi said: “To serve (lower-value customers), it’s quite expensive. In the past, we paid only about 2,000 rupiah for one SIM card. Currently, (it costs) around 8,000 rupiah; and then they (customers) keep churning from one operator to another… so they’re not giving us any margin.”

RHB expects the company to gradually increase prices from May onwards. Smaller data plans could see increases of 5 per cent to 7 per cent, and larger data plans could see increases of 1 per cent to 2 per cent.

DBS analyst Sachin Mittal said the price increases should be palatable since there is genuine differentiation in service quality in Indonesia. “You maintain your network quality, and you charge a premium price compared to others. They’re already charging this premium price and (letting) the low-end user churn out,” he said.

His estimates indicated that Telkom’s ARPU is about 1 per cent of disposable income. There should be room to grow that ratio, he said, noting that ARPUs are about 2 per cent of disposable income in Thailand.

But Mittal also noted that in Indonesia, fixed broadband ARPUs are about six times those of mobile.

This differential should narrow to about three to four times as mobile ARPUs rise, but he also expects fixed broadband ARPUs to fall over time. “I think that Indonesian fixed broadband ARPUs are quite high compared to purchasing power. That has been a bottleneck in the expansion of fixed broadband, so there’s no doubt in my mind that fixed broadband ARPUs will keep sliding down gradually over time,” he said.

Citi analysts Arthur Pineda and Luis Hilado said in a note on May 2 that there could be near-term headwinds to broadband household penetration as employees return to the office.

“In addition, competition on broadband has escalated with network build-outs and wholesaling activities from competitors,” they said.

*Clarification note: The article had earlier said that Telkom Indonesia expects to save up to seven trillion rupiah annually as a result of synergies from the merger between Indihome and Telkomsel. Telkom has clarified that it expects five trillion rupiah in savings instead.