Cut In Interconnect Usage Charges To Impact EBITDA Levels Of Incumbents By 4-5%

The Telecom Regulatory Authority of India (TRAI) has reduced interconnect usage charges (IUC) – paid by telecom companies for calls originating from their network and terminating on other networks – to 6 paise per minute from 14 paise per minute, effective 1 October 2017. Moreover, TRAI is likely to reduce the charges to zero, effective January 2020.

According to India Ratings and Research, the reduction in IUC to 6 paise per minute would have a 4 percent to 5 percent impact on the earnings before interest, tax, depreciation and amortisation (EBITDA) levels of incumbents like Bharti Airtel Ltd., Idea Cellular Ltd. and Vodafone India Ltd.

On the other hand, this could help Reliance Jio Infocomm Ltd. to save Rs 35 billion to Rs 40 billion in IUC annually. This added advantage may incentivise Reliance Jio to continue with the discounted pricing strategy to increase its subscriber base. In July 2017, Reliance Jio had a 9.1 percent market share in terms of visitor location register demitting active subscribers. The impact on EBITDA would be 7 percent to 9 percent, if IUC are reduced to zero. At present, incumbents are already witnessing margin pressure due to declining industry-level average revenue per user after the launch of Reliance Jio in September 2016. Airtel and Idea reported a 700 basis points and a 1,000 basis points erosion in their EBITDA margin levels on a year-on-year basis for the first quarter of financial year 2017-18, respectively.

Small telecom companies could marginally benefit, as their costs from calls to other networks would come down. However, they have been losing subscribers since the launch of RJio. Incumbents have also been on the receiving end with regard to subscribers. In August 2017, Airtel lost subscribers for the first time since August 2016, and Vodafone and Idea lost subscribers for the second consecutive month.

India Ratings estimates the impact of the cut on the standalone leverage levels of incumbents at 0.1-0.3 times (when IUC is reduced to 6 paise per minute) and at 0.2-0.6 times (if IUC reduces to 0 paise from 14 paise).

Vodafone Mobile Services Ltd. has a negative outlook rating, reflecting near-term pressure in the sector. Moreover, Ind Rating has a negative outlook for the telecom sector, indicating expectations of a higher deterioration in the credit profile of telecom companies due to stiff competition posed by Reliance Jio, as well as of negative free cash flows due to a double whammy of weak earnings and capex. The credit metrics of incumbents are deteriorating on a year-on-year basis, thus indicating a gradual stress build-up in the sector. Net leverage has been increasing after witnessing a recovery in FY15 and interest cover has been on a downtrend since 2015.

Against the backdrop of reduced IUC revenue, the telecom sector is likely to witness a delayed recovery in line with India Ratings’ FY18 negative outlook.

India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.