Bharti Airtel, Idea Cellular To Bear The Brunt Of Interconnect Charge Cut, Say Brokerages
Morgan Stanley, CLSA & Goldman Sachs expect Reliance Jio to benefit from TRAI’s IUC cut.
The Telecom Regulatory Authority of India’s decision to cut interconnect usage charges by 57 percent is likely to negatively impact the current large incumbent telecom operators, while it will benefit newer and smaller players, according to brokerages.
TRAI cut IUC to 6 paise from 14 paise in a move to reduce voice call rates.
Interconnect usage charges are payable for cross-operator calls. For example, Reliance Jio Infocomm Ltd. will have to pay a fee for every call its subscriber makes to a Bharti Airtel Ltd. user, and vice versa. This means, older operators with more subscribers and bigger networks tend to receive more calls, and thus, make money from the charge.
How Does It Benefit Reliance Jio
Morgan Stanley, CLSA, Goldman Sachs, Motilal Oswal and Kotak Securities in their reports mentioned Reliance Jio as a beneficiary of the interconnect usage charge cut.
CLSA expects Reliance Jio’s earnings before interest, depreciation and amortisation and tax (EBITDA) to rise by 20 percent in the financial year 2018-19. It also expects the latest entrant into the Indian telecom space to be profitable and generate cash from financial year 2018-19. Motilal Oswal estimates a total annual savings of more than Rs 4,500 crore for the Mukesh Ambani-led firm.
Reliance Jio, which launched its services in September 2016, has paid close to Rs 2,600 crore as interconnect usage charge in seven months. The company also launched JioPhone, which will allow the operator to service 50 crore feature-phone subscribers in India and drive adoption of 4G data.
As the new feature phones will target voice-heavy customers, a reduction of a variable expense like IUC will lower the pressure on the company’s margin. HSBC report said Reliance Jio’s business model works the best in a lower or no IUC model as voice calls are free.
What Happens To Bigger Players
Bigger and listed players like Bharti Airtel and Idea Cellular Ltd. can see a hit on their EBITDA in the range of 2-13 percent.
A fall in EBITDA will also risk current players’ leverage position as it would further increase their net debt-to-EBITDA ratio.
IUC has been reduced four times from a high of 50 paise in 2003 to 6 paise per minute.
Globally, too, IUC has been reduced by over 50 percent in many developed markets such as Australia, the U.K., and other European countries.
