In event of IUC cut, Reliance Jio to make twin gains

Idea to be hit most; Jio's decision to pass or retain benefits will decide sector's pricing scenario

Any cut in the interconnect usage charge (IUC), the centre of debate in telecom circles, has largely one winner, Reliance Jio (RJio), apart from the customer.

While there are twin gains for RJio in the form of lower outgo and a conducive environment to drive subscriber addition, incumbents will be hurt the most. IUC is paid by operator companies for voice calls terminating on another's network

Reliance Jio

First, the impact on the older companies. Idea Cellular will be the most impacted. Most analysts believe the Telecom Regulatory Authority of India (Trai) will cut IUC by 30 per cent, from the current 14p each minute to about 10p. PhillipCapital's Manoj Behera estimates an impact of two to three per cent on the consolidated operating profit of Bharti Airtel. That for Idea is pegged at 10 per cent if the IUC rate is cut by four paise.

Unlike Idea, Bharti's operating profit will be less impacted — it also includes Africa operations, direct-to-home (DTH) cable services, fixed line broadband and enterprise services, including international long distance services.

Source: HSBC Securities

Idea's balance sheet is already stretched and a 10 per cent impact on operating profit will be significant, say analysts. Less operating profit will constrain its ability to fund capital expenditure or to service debt. Operating profit for the June quarter was Rs 1,875 crore or about Rs 7,500 crore on an annual basis. Given the capital expenditure of Rs 6,500 crore and another Rs 4,615 crore of interest cost, it will have to either take on more debt or sell its tower assets (stake in Indus or standalone towers) to maintain the capex level and service the debt.

The key beneficiary of a cut will be Jio. Analysts estimate a monthly voice volume of 500 minutes, with 70 per cent or 350 minutes of calls to other operators. At the current 14p per minute, the company pays about Rs 49 per user per month to other operators. Given the 120 million subscribers, that would be Rs 600 crore a month or Rs 7,200 crore annually. A 30 per cent cut would save it about Rs 180 crore or Rs 2,000 crore annually. If the IUC is entirely withdrawn, it would be a bonanza for Jio, says an analyst.

The bigger worry for incumbents is if Jio passes on the benefits from a steeper cut in IUC to subscribers. For, this will further depress realisations, down significantly since the December 2016 quarter. With the launch of its 4G (fourth-generation technology) feature phone, Jio will be able to tap a much larger subscriber base who were using plain feature phones and subscribers of existing players. IUC, from this perspective, will also have an impact as these are low average revenue per user customers but with higher voice usage.

Data compiled by BS Research Bureau

Rajiv Sharma and Darpan Thakkar of HSBC say the feature phone segment is voice-heavy and data adoption could be more gradual. Adding voice-heavy subscribers on the network at the prevailing termination rates might put more pressure on Jio's profitability. Further, there will be a gradual reduction in interconnect payout, led by higher within-network calls due to an expanding subscriber base, they add.

Analysts say it will take three to four years for a higher proportion of calls to stay within the Jio network, as current users start using it for voice or call within or make Jio their primary SIM. Currently, dual SIMs use Jio for data and others for voice. Analysts estimate voice calls originating and terminating within RJio to be about 10 per cent.