According to experts, the Telecom Regulatory Authority of India's (TRAI) decision to cut call connect charges will hit incumbent operators like Bharti Airtel, Vodafone and Idea Cellular among others, and could further increase pressures on the already stressed sector.
Interconnect usage charge or IUC is something companies charge for allowing domestic calls from a rival telecom operator to terminate on their network. Currently, telecom operators charge 14 paise a minute as IUC. TRAI on Sept 19, announced that IUC will be reduced to six paise per minute from October 1, 2017 and will be abolished for all local calls from 2020.
Analysts tracking the sector estimate that the move will shave off the Earnings Before Interest, Taxes, Depreciation and Amortization (EBDITA) of the older telecom operators by 2 to 5 per cent this year, declining further over the next few years as the IUC becomes zero.
“Direct impact is a 3 to 5 per cent hit on FY2018 estimates, 6 to10 per cent hit on FY2019 estimates and a 7 to 12 per cent hit on FY2020 estimates, expected over the EBITDA of incumbents,” said Rohit Chordia, analyst at Kotak Institutional Equities.
Deliberations over IUC were on for an year now, and while a cut was expected, analysts like Chordia say that the 57 per cent cut announced by TRAI was definitely higher than the estimated 30 to 50 per cent.
Goldman Sachs too cut its EBITDA estimates on Bharti Airtel by 2 per cent to 4 per cent and on Idea by 6 per cent to 10 per cent over FY2018-2020. It expects Airtel's cash flows to be impacted by about $150 million, while Idea too is expected to generate $250 million of negative cash flow.
Given that the size and scale differs from operator to operator, in the existing regime, some telecom operators end up earning more IUC, while some end up as net IUC payers.
Bharti Airtel, Vodafone and Idea had earlier written to TRAI seeking an extension of IUC and are clearly disappointed with TRAI's move.
Telecom companies are already stressed due to high debt incurred on buying spectrum and expanding network infrastructure. The average revenue per user has also been subdued due to the aggressive competition from Reliance Jio, which launched last year, offering free voice calls, and extremely cheap and unlimited data plans.
Bharti Airtel says the cut in IUC will further worsen the situation. Rival Vodafone, which is in merger talks with Idea Cellular, too said the move was “retrograde” and would have serious consequences on investment in rural coverage.
The cut in IUC thus is expected to benefit the newer entrant Reliance Jio, as currently more calls from Jio's network end up on the network of the incumbents.
“At a per-consumer level, on a 100 million subscriber base, a saving of $550 to 600 million translates into roughly Rs 30 to 33 per subscriber per month. Whether Jio retains the benefit or chooses to pass on some or all of it to the consumer is tough to say. However, that this move by TRAI opens up the possibility of Jio becoming more aggressive is a clear negative for incumbents,” said Chordia.
The incumbent telecom operators reported stable quarter-on-quarter revenue in the April-June quarter after two quarters of sharp sequential declines. However, it may not have hit a bottom yet, said Himanshu Shah, analyst at HDFC Securities.
“The potential tariff war led by the IUC cut, downward repricing owing to aggressive bundling and the impact of Jio feature phone on the segment remains unknown. Further, an increase in capital expenditure and operational expenditure to ramp up LTE capacity could also keep margins under pressure,” said Shah.
It is expected that some of the incumbent telecom operators will challenge TRAI's decision in courts.
Shares of Bharti Airtel opened sharply lower, hitting a low of Rs 370 versus Sept 19 close of Rs 397.50, but recovered in the afternoon to trade about 0.7 per cent higher. Idea Cellular shares were down by 2.7 per cent and Reliance Communications also declined by1.50 per cent. The broader BSE Sensex was up by 0.2 per cent or about 51 points at 32,453.27.
