Call drops to hit telcos' operating profit: Analysts

7-8% impact seen as Supreme Court refuses to grant interim stay on Trai's order

The financials of telecom operators continue to be at a risk, as the country's apex court has not granted an interim stay on the sector regulator's decision to levy a penalty for call drops (incomplete calls). While the Supreme Court on Friday agreed to hear the petition challenging the regulator's fiat on penalty for call drops, it refused to grant an interim stay on the Telecom Regulatory Authority of India (Trai)'s order.

Trai's move has not gone down well with the investor community either, as they blame government's poor spectrum policy for the call drops. HSBC Global Research says, "In our view, call drop is an outcome of poor spectrum policies, supported by the fact that Indian telcos are way below the global average on spectrum allocations."
 

Credit Suisse too said in a note: "Anyone designing telecom networks would know that ensuring zero per cent call drops is near impossible for commercial (i.e. profit-oriented) operators. Interestingly, the new rules seem to have no link to the old rules where a two per cent call drop rate was acceptable to the regulator. So, even an operator that is currently meeting the old two per cent call drop limit could still end up paying a penalty under the new rules."

Trai's October order said telcos would have to pay a compensation of Re 1 for every incomplete call from January 1, 2016. The regulator has capped the penalty at three calls per day per consumer. The penalty will be credited as extra talk time with the customer's existing tariff plan. A penalty of Re 1 per call drop is nearly three times the money telcos earn for a call in a minute. No wonder, telecom companies are ready for a legal battle. Interestingly, the new regulation does not allow leeway of two per cent incomplete calls, which means the regulator expects the network to be perfect all the time.

If implemented, telecom analysts expect the regulation to lead to a decline of seven to eight per cent in the operating profit of telecom operators. Operators that have had a call drop rate of two per cent or below will see a negative impact of three to four per cent on their operating profit. Analysts expect four per cent of total calls on all networks would face this problem, leading to a significant impact on revenues and operating income of telcos.

According to Credit Suisse, Bharti's average revenue per minute can be hit by 2.9 per cent and mobile Ebitda (earnings before interest, tax, depreciation and amortisation) by 7.4 per cent. The brokerage expects Idea's average revenue per user (ARPU) to be hit by three per cent and mobile Ebitda by 8.1 per cent, assuming 50 per cent of its minutes of use are outgoing calls. HSBC Global Research also expects the potential penalties to have an adverse impact on Bharti's revenue by four per cent and Ebitda by seven per cent.

In terms of value, telecom players could end up losing Rs 54,000 crore per annum as compensation for call drops. This would result either in closure of networks or a rise in tariffs, the telecom operators had said in a letter to Trai. "The annual industry compensation due to dropped calls may range from Rs 10,000 crore in case 10 per cent of subscribers claim compensation to Rs 54,000 crore in case 50 per cent of subscribers claim the same. This amount would represent up to 37 per cent of the industry's annualised adjusted gross revenue in case of 50 per cent claims." Trai, however, had said that call drops compensation will only result in payout of Rs 800 crore annually.

The operators' bodies - Association of Unified Telecom Service Providers of India (AUSPI) and Cellular Operators Association of India (COAI) - in a joint letter have moved Trai stating that the authority's regulation to compensate call drops is "grossly unjust". This, they say, will negatively impact both consumers and service providers.

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WHAT ANALYSTS SAY

• Operating profit of telcos could be hit by seven to eight per cent
   
• Ensuring zero per cent call drops nearly impossible for commercial operators
   
• A penalty of Re 1 per call drop is about three times the money a telecom firm earns for a call in a minute
  

 

Four per cent of total calls on all networks likely to face the glitch
 

New rules too stringent as old rules allowed call drop rate of up to two per cent
 

The move could lead to closure of networks or a rise in tariffs
 

Indian telcos are way below the global average on spectrum allocations