It's advantage Reliance Jio in telecom battle with Bharti Airtel and Vodafone: What else brokerages said on Trai order
Even as Mukesh Ambani-owned Reliance Jio has rejected charges that it stands to gain post Trai's directive on a cut in mobile termination rate (MTR) or interconnect usage charges (IUC), incumbents such as Bharti Airtel, Vodafone and Idea Cellular have argued that every call on the network has a cost, and expenses of an incoming call on their network should be borne by the operator from whose network the call has originated.
Telecom Regulatory Authority of India (Trai) announced slashing of the interconnection usage charge (IUC), the charge paid by telcos for mobile calls made by their customers to networks of other companies to 6 paise a minute, from 14 paise at present.
Also read: TRAI slashes IUC: Big telecos to feel the pinch, but will your mobile bills come down?
We look at what various brokerages/analysts said on the effect of Trai's directive.
ICRA
Harsh Jagnani, Sector Head and Vice President, Corporate Ratings, ICRA said: "At the industry level, IUC is largely a zero-sum but it impacts each operator differently, driven by the extent of traffic asymmetry between them. An operator with higher proportion of off-net incoming minutes over off-net outgoing minutes benefits by way of net inflow of IUC revenues, and vice-versa. While the larger incumbents had always been net earners of IUC revenues, the extent of gain had increased following the launch of services by RJio, with free voice plans leading to higher off-net outgoing traffic from RJio subscribers. Thus, the latest TRAI regulation is expected to translate into savings for RJio in terms of the IUC it had to pay to other operators - as per RJio's financials, its IUC charges for FY2017 stood at Rs. 2,589 crore, for around seven months of service. "
Geojit Financial
VK Vijayakumar, chief investment strategist at Geojit Financial services said IUC cut is a decision that cannot be faulted in theory. India has been following a declining glide-path in IUC since 2003 when it was fixed at 30 paise. This was cut to 20 paise and 15 paise respectively in 2009 and 2015. Theoretically this is a good decision since it is based on a sound economic principle of long run incremental cost.
The catch however, is the fallout on the industry that is struggling due to Jio-induced disruption. The industry is likely to take a hit of Rs 5,000 crore consequent to this decision. This will only aggravate the crisis in the industry when some of the incumbents are struggling and are likely to close down. It is also important to note that the banks have an exposure of around Rs 4 lakh crore to the telecom industry. It is likely that the exit of some of the incumbents might hit the banks at a time when the stressed assets of the banks have become an area of serious concern and perhaps the major constraint on economic growth. In brief, this is a good decision taken in haste.
Kotak Equities
The 57 percent cut in the termination charge is estimated to lower Jio's IUC spend by around Rs 4,000 crore on an annualised basis. "At a per-consumer level, on a 100 mn sub base, a saving of US$550-600 mn translates into roughly Rs30-33/sub/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 in our view," Kotak Equities said in its note.
Meanwhile, the three incumbents, Bharti Airtel, Vodafone and Idea Cellular are likely to face a combined revenue loss of Rs 4,700 crore, according to estimates. Morgan Stanley estimated the fee cut could lead to an about 40 percent plunge in Bharti Airtel's annual profit, adding that Reliance Jio Infocomm would be the key beneficiary of the move.
HDFC Securities
HDFC securities in a note said: The zero-IUC regime will impact Bharti's consolidated/India wireless EBITDA by 4-6% (Rs 14-16 billion ). With Idea being a purely domestic player, the rate cut would have a more profound impact at 12% (Rs 11-13 billion).
The brokerage estimates Jio's net IUC payout at Rs 50-60 billion.
Savings from IUC would enable Jio to continue with its aggressive GTM (go-to-market) strategy for an elongated time, till it achieves a respectable market share. Currently, Jio has 8-9% subscriber and 3-4% revenue market share. However, by CY20, the IUC rate cut impact should minimize, as Jio gains market share and minutes distribution become more symmetric.
Goldman Sachs
"While this regulation change will have a negative near-term impact on incumbents, the medium-to-long term impact is likely to be less pronounced given the symmetrical flow of traffic between incumbents and Jio over time. However, the IUC regulation change does highlight regulatory risks in the India telecom sector, and investors may question whether any further regulatory change in the telecom sector could negatively affect incumbents," said a report by Goldman Sachs Global Investment Research.
Deutsche Bank
"Based on past precedents, it is likely that incumbents would mount a legal challenge to the MTR (or IUC) cut though the probability of any changes in the recommendation is fairly low (based on outcome of previous cases)," Deutsche Bank said in a report. "However, the announcement also resolves one of the last remaining event risks for the companies, especially Bharti," it said.
