The decision of Telecom Regulatory Authority of India (TRAI) to cut call connection charge rate or interconnection usage charges (IUCs) by more than half will dent incumbent operators’ earnings but benefit new entrant Reliance Jio, according to rating agencies. However, TRAI maintained its decision as scientific, saying that there is no question of helping or harming any operator(s).
“The TRAI’s decision would adversely impact the larger incumbents over the medium term, and in the process benefit the new entrant, Reliance Jio,” Icra, a domestic rating agency, said on Wednesday.
In line with Icra, another global ratings agency Fitch maintained that the cut in the interconnection user charges will lead to transfer of up to $600 million per year to newcomer Reliance Jio from the incumbent operators. “The move will bring a significant cost-savings and lead to faster-than-expected break-even in pretax profits for Jio,” it said, adding that the pretax profits of the incumbents, including Bharti Airtel, Idea Cellular and Vodafone, will be dented by 3 to 6 per cent for the financial year ending March 2018.
The incumbents are reported to be contemplating to challenge TRAI’s decision in court.
However, TRAI has dismissed charges of non-transparency in its decision to cut the IUC by 57 per cent to 6 paise/minute from October 1.
“The cost calculation is objective and scientific and there is no question of helping or harming any operator. The IUC charge finalised by TRAI was driven by considerations of consumer and industry interest, competition and the march of technology,” said TRAI Chairman RS Sharma.
Cellular Operators Association of India (COAI) Director General Rajan S Mathews demanded the regulator to explain the calculation model it has used to arrive at the figure of 6 paise/minute for the interconnection usage charge.
Mathews contended that the assumption of TRAI that all operators should move towards VolTE technology is not practical as it will hit services for 2G users who account for 70 per cent of the total subscriber base in the country. “In the last financial year, industry revenue from IUC at 14 paise was around Rs 10,000 crore. At 6 paise, we expect it to decline to Rs 5,000 crore,” Mathews added.
Explaining the pros and cons of the TRAI’s decision, Fitch said operators pay the IUC when one of their customers makes a voice call to a user on another network, with the fee going to the operator on which a call terminates and hence, those with large subscriber bases tend to be net recipients of these interconnection fees.
Icra added while larger incumbents had been net earners of IUC revenues, the extent of gain had increased following the launch of services by Jio, with free voice plans leading to higher off-net outgoing traffic from Jio subscribers.
“Thus, the latest TRAI regulation is expected to translate into savings for Jio in terms of the IUC it had to pay to other operators,” it said, adding that Jio paid Rs 2,589 crore to other operators on this account in FY17.
Fitch said Bharti Airtel alone received about $75 million in interconnection revenue from Jio in April-June quarter this year. The agency, however, said that the removal of the IUC will have a much smaller impact as the payment by Jio, which had a 9.6 per cent subscriber share with 98 million customers in July 2017, for interconnections fees to incumbents will fall with the growth in subscriber base.
For the largest telcom player Airtel, it estimated a 5 per cent reduction in revenue and pretax profits in FY18 due to the IUC cut and competitive pressures.
Fitch said Jio is gearing up with more offers to attract more subscribers and estimated the new entrant’s revenue market share to double to 10 per cent by 2018.
Domestic brokerage Kotak Securities said it will hit incumbents’ pretax profits by 3-5 per cent in FY18, 6-10 per cent in FY19 and 7-12 per cent hit in FY20.