Incumbent telcos face Rs 3,500 crore/year revenue hit; smaller telcos such as RCom, Aircel get some respite
Reliance Jio will be the biggest beneficiary of Telecom Regulatory Authority of India’s (Trai) move to more than halve interconnection usage charges (IUC) to 6 paise/minute, which will help it break even faster, according to analysts.
The move will result in a transfer of $500-600 million per year from incumbents including Bharti Airtel, Vodafone and Idea Cellular to Mukesh Ambani-led Reliance Jio, Fitch Ratings said in a report on Wednesday. “It should bring significant cost-savings and lead to faster-than-expected Ebidta (operational profit) breakeven for Reliance Jio,” it said.
Bharti alone received about $75 million in interconnect revenue from RJio in April-June 2017.
Trai on Tuesday fixed IUC at 6 paise from the current 14 paise, to be implemented from October 1 this year. IUC will be brought down to zero from January 2020. IUC is paid by a telecom operator on whose network call originates to another operator on whose network calls terminate.
However, the development will negatively impact existing operators including Airtel, Vodafone and Idea Cellular. The Ebidta level of all top telcos will be impacted by this move.
According to Fitch, the Ebitda of the main incumbents – Bharti Airtel, Idea Cellular and Vodafone India – will be impacted by 3-6% this fiscal, putting further pressure on these companies.
As per a report by brokerage CLSA, the IUC cut will bring down Bharti Airtel/Idea Cellular’s Ebitda by 4-7% in fiscal 2019.
Though Reliance Jio will be a beneficiary of the lower access cost. Post the entry of Reliance Jio in the sector, the incumbents have seen their profits and margins declining. With a cumulative debt of about Rs 4.5 lakh crore, the industry has also asked financial incentives from the government.
In addition to the IUC cut, incumbent operators also face other headwinds of average revenue per user (Arpu) dilution and subscriber churn with the upcoming ramp-up of RJio’s 4G feature phone and tariff promotions. “This will boost unlimited calling plans, which in turn should drive sector consolidation,” CLSA said.
However, going forward when IUC will be zero – starting January 2020 as directed by Trai -- it is expected to have a much smaller impact. RJio’s net payment of interconnect fees to incumbents will fall as its subscriber base grows and asymmetry will be minimal by 2020, Fitch said.
RJio had 98 million active subscribers at end-July 2017 – a 9.6% share. Moreover, overall voice revenue will continue to drop as a result of Jio free voice call offerings.
An analyst report by Philip Capital says incumbents will see sharp pain, with Idea being hit most with the move to cut down IUC. “Historically, the impact of IUC cuts have not been much because of lower incoming-outgoing ratio and considerably higher Ebitda margins of incumbents. However, with a sharp decline in Ebidta margins already, and skewed traffic after Jio’s launch, the impact on Ebitda this time around should be more pronounced.”
RJio will gain the most, it’s strategy hinges on providing free voice services.
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