Lower IUC seen as ending incumbency advantage of Airtel, Vodafone, Idea
New Delhi: A day after the telecom regulator decided to reduce and eventually remove call termination charges, stock brokerages highlighted concerns over the regulatory environment in the sector and the loss of incumbency advantage for established telecom firms. However, the impact will fade over the medium-to-long term, they said.
On Tuesday, the Telecom Regulatory Authority of India (Trai) ordered a cut in interconnection usage charges (IUC)—paid by the telco that originates a call to the one which receives the call—from the current 14 paise to 6 paise, and phasing out these charges by 1 January 2020. The decision is a setback for incumbent telcos such as Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd and a potential boost for newcomer Reliance Jio Infocomm Ltd.
“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 20 September report by Goldman Sachs Global Investment Research.
According to a 19 September Kotak Institutional Equities Research report, the strong arguments in favour of BAK (bill and keep) that Trai has put forth in the announced IUC cut regulatory document “is a much bigger negative than the quantum of the cut”. Reliance Jio had advocated the bill and keep model wherein IUC will be effectively scrapped.
“We see this development as the second instance of the incumbents being unable to get their (logical to us) view on an important regulatory development accepted. The first instance was renewal of extant spectrum; the regulator’s decision to auction in-use spectrum made the renewal auctions a business continuity issue and led to hefty spectrum payouts,” the Kotak report said.
The issue of renewing or extending the licences of Bharti Airtel Ltd and Vodafone, India’s top two telecom firms, in certain circles such as Mumbai and Delhi, became contentious after the government said in 2013 that telcos must win back the spectrum they hold to retain their licences. It led to aggressive bidding in these circles for 900 MHz spectrum, severely denting their financials.
“Each such regulatory decision chips away at any incumbency advantage. Managing the regulatory side of the equation on grey areas like IUC is critical and incumbents have not done a good job here,” the Kotak report added.
The entry of Reliance Jio has disrupted India’s telecom sector that took wings only a couple of decades ago. It has driven down revenues of telcos across the board, and triggered consolidation in the industry.
The potential cut in IUC was a significant overhang on the stock prices of Bharti and Idea.
Shares of Bharti Airtel, Idea Cellular and Reliance Communications Ltd fell as much as 6.2%, 7.4% and 4.2%, respectively during the day, while those of Reliance Industries Ltd, parent of Reliance Jio, hit a record Rs872.10 (up 3.8%) intraday on Wednesday.
However, Bharti shares recovered towards late trading to end little changed as analysts advised buying it at lower levels due to strong fundamentals.
Telcos have said they will challenge the regulation in courts.
“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 added.
According to a report by Motilal Oswal Securities Ltd, with a major regulatory headwind behind, the focus will now shift to execution.
“Bharti has consistently added active subscribers in the last four months, while Idea has protected its market share. We believe RJio’s continued freebie reduction should taper competitive intensity further, driving ARPU accretion in the market,” it said.