Mumbai: Shares of telecom companies Bharti Airtel Ltd, Idea Cellular Ltd and Reliance Communications Ltd slumped 6.2%, 7.4% and 4.2%, respectively, while those of Reliance Industries Ltd, which owns Reliance Jio Infocomm Ltd, hit a record high at Rs872.10 (up 3.8%) intraday on Wednesday.
Investors are reacting negatively to Telecom Regulatory Authority of India’s (Trai) new mandate wherein it has reduced interconnect usage charge(IUC) to 6 paise with effect from 1 October and totally scrapped it for all local calls starting 1 January 2020.
The move may see lower call charges as the telecom regulator has cut the rates paid by an operator for termination of mobile call on a rival network by almost half from current 14 paise.
According to a Mint report, analysts had earlier estimated that a reduction in IUC from 14 paise to 6 paise would mean a gain of around Rs3,800 crore for Reliance Jio and a corresponding loss for incumbents. Analysts at Kotak Institutional Equities estimate Jio’s net spend on account of IUC to be in the region of Rs7,000-7,500 crore annually. Large incumbents such as Bharti Airtel, obviously, stand to lose a large chunk of this revenue stream, which contributes about 14-18% of their operating profits, Mint said.
In April-June quarter this fiscal, Bharti Airtel had reported its smallest profit in 18 quarters as the price war triggered by newcomer Reliance Jio led to a massive 75% fall. Its Q1 net profit was at Rs367 crore, 74.9% lower than the year-ago period. During the period, its net income was at Rs1,462 crore.
In 2017 so far, Bharti has gained 29.26%, while Idea Cellular climbed 12.24%, with the BSE Telecom index beating benchmark Sensex and Nifty. This year, BSE Telecom was up 25.04%, Sensex jumped 21.69% while Nifty gained 23.97%.
Most analysts said that the move is likely to be a negative surprise for telecom stocks except Jio. Bank of America Merill Lynch sees Bharti’s consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) to be impacted by 2-5% and Idea’s Ebitda impact to be 4-13% till FY21. The research firm estimates Bharti and Idea’s Ebitda to slip by 6-15% beyond FY21.
As Jio would be the biggest beneficiary of the IUC rate cut, Bank of America Merill Lynch said that it remains to be seen if the new telecom company passes IUC cut benefits to consumers as cheaper tariffs or reinvests that into the business.
According to it, the move to a bill and keep (BAK) regime in the coming years would force existing telecom companies to upgrade their networks to VoLTE as ideally they would like to migrate their traffic to VoLTE to reduce cost. “Among incumbent telcos, we find Bharti to be best placed and our checks suggest that Vodafone and Idea are 6-9 months behind Bharti in launching VoLTE. While in theory, smaller telecom companies would benefit from the IUC rate cut, we think they will be worse placed in the longer term as they would unlikely be able to launch VoLTE (and accelerate consolidation),” Bank of America Merill Lynch added.
Stating that the move will likely have less absolute impact on Idea than on Bharti, Goldman Sachs has cut Ebitda estimates of the latter by 2-4% for FY18-20. It said that the cut in IUC will negatively affect Bharti’s annual cash flow by $150 million though it expects the company to stay free cash flow positive in FY18 and FY19. It has reduced Idea’s FY18-20E Ebitda by 6-10% given its smaller Ebitda base and thinks it will have $250 million of negative free cash flow in FY18.
According to Goldman Sachs, the move will aid Reliance Jio to generate an additional $200-450 million of Ebitda during FY18-20. It has revised FY19 Ebitda margin for Jio to 27% from 19% previously.
Motilal Oswal Securities Ltd said that the immediate Ebitda impact for Bharti and Idea should be less than 5%. “Cut in IUC could impact Bharti’s revenue by 6-7%. After deducting the IUC outgo, the net EBITDA impact should be less than 5%. For Idea, we expect the impact to be lower, given that it has lower incoming off-net traffic,” it added.
According to the research firm, when IUC was reduced to 14 paise from 20 paise per minute in the fourth quarter of FY15, Bharti saw a revenue impact of Rs140 crore and Idea saw a revenue impact of Rs100 crore. “However, the impact would be 2-5% higher this time, given the launch of Jio and the subsequent IUC receipts from RJio,” it added.