Cut in interconnect usage charges rate will hit margins of Airtel, Idea: Analysts

The cut in the interconnect usage charge (IUC) by the Telecom Authority of India (TRAI) on Tuesday would put pressure on the margins of companies such as Bharti Airtel and Idea Cellular, say various analytical reports.

The biggest beneficiary of this regulatory change, however, will be Reliance Jio that may see an over 20 per cent higher margins based on the current financial year’s EBITDA estimates, reports said.

TRAI had reduced the termination rate to 6 paise per minute from current 14 paise per minute, effective October 1, and a zero regime effective January 2020. “The direct impact is a 3-5 per cent hit on estimated earnings of financial year 2018, 6-10 per cent hit on FY2019 earnings and 7-12 per cent hit on FY2020 EBITDA for the incumbents, lowest on Bharti and highest on Idea,” said Kotak Institutional Equities in a report.

The quantum of cut was the only uncertain variable and the announced cut of 57 per cent (from 14 paise to 6 paise) was certainly higher than its estimated 30-50 per cent, the report said.

Analysts also noted that the cut in IUC rate would lead to more bundled plans by the incumbents, leading to a faster shift from voice to data revenues.

For instance, Reliance Jio is likely to pass on the savings from lower IUC in the form of lower prices, particularly for its feature phone plans where its current price of ₹153/month is higher than industry average revenue per user (ARPU), said analysts.

Operators will now be disincentivised to support low ARPU customers who primarily receive incoming calls and may move these to minimum threshold ARPU plans, they said.

Markets such as the US, Hong Kong and Singapore, which have zero IUC, are primarily post-paid markets where customers have to sign up for bundled packages (in short, incoming is not really free in these markets either), they highlighted.

Meanwhile, incumbent operators are likely to focus on upgrading their networks to VoLTE at a faster pace to reduce the cost of call termination on their networks now. The move to a Bill and Keep regime in coming years would also force existing telcos to upgrade their networks to VoLTE to reduce cost.

“Among incumbent telcos, we find Bharti Airtel to be best placed, with its 75,000+ 4G sites to launch 4G in coming months. Our checks suggest that Vodafone/Idea are six-nine months behind Bharti in launching VoLTE,” said Bank of America Merrill Lynch in its report.

Furthermore, the lower IUC charge will increase the profitability of unlimited voice calling plans thus incentivising operators to offer them to all subscribers, said analysts’ reports. While smaller operators will benefit from the lower IUC charge, their inability to upgrade networks is likely to limit their ability to offer unlimited voice plans at lower rates. This in turn is likely to drive further consolidation in the sector, they added.

The telecom industry expectedly registered another quarter of revenue decline, led by continued hyper competition. Incumbent operators remain aggressive to match the pricing of RJio’s to retain subscribers. The drop in Adjusted Gross Revenue (AGR) of the industry decelerated to 4.5 per cent quarter-on-quarter (QoQ) against 11.5 per cent QoQ in the fourth quarter 2016-17, while 24 per cent YoY decline was the highest in the last three quarters.

According to the incumbent players, the latest regulation is disappointing, especially at a time when the industry is facing severe financial stress.

For instance, Bharti Airtel in a statement said: “The suggested IUC rate, which has been arrived at in a completely non-transparent fashion, benefits only one operator which enjoys a huge traffic asymmetry in its favour. The sharp drop in the IUC rate will only help transfer part of its cost to other operators, thereby further worsening the financial health of the industry.”

Vodafone India said this was yet another retrograde regulatory measure that would significantly benefit the new entrant alone while adversely affecting the rest of the industry as a whole. “Unless mitigated, this decision will have serious consequences for investment in rural coverage, undermining the government's vision of Digital India,” it said.

Looking at the current situation, the incumbents have the option of challenging TRAI’s decision at TDSAT or in the courts, added analysts.

“Implementation of Bill & Keep regime will help in making services more affordable for Indian customers. It should have been implemented in 2014 as envisaged in the 2011 Report submitted by TRAI to the Supreme Court and will be six years too late. RJio has always offered free voice services to its customers. There is no question of any advantage from the new IUC regulation to RJio as it has already passed on all the benefits to customers. We deny any benefits to RJio,” according to statement by a RJio spokesperson.