Vodafone Idea to get temporary relief if inter-connect usage charges extended beyond January

Loss-making telecom operator Vodafone Idea (VIL) stands to gain the most if the deadline for scrapping inter-connect usage charges (IUC) by Trai (Telecom Regulatory Authority of India) is extended. VIL gets about 30% of its overall operating income from IUC.

IUC charge is paid to the operator on whose network a call terminates. Trai had last reduced it in September 2017 by a sharp 57% to 6 paise per minute. Prior to it, the rate was 14 paise per minute. At that time, the regulator had said it proposes that from January 2020 operators move to a regime of zero rate.

Gains of Bharti Airtel will be muted as these charges make up for less than 10% of the telco’s India mobile revenues. Currently, Reliance Jio pays about 18% of its EBITDA as IUC charges.

Even if the decision to scrap IUC is deferred, Vodafone will only get a temporary reprieve. “There is no talk of the decision being permanently reversed and the extent of the impact on stock prices would, therefore, be a function of how long the timeline is extended by,” analysts at Citi Research noted.

VIL’s weak financial run is expected to continue and analysts believe the company is unlikely to arrest the revenue decline even in Q2FY20. VIL’s wireless broadband subscriber growth remains muted and this gap between VIL and Bharti Airtel continues to widen, said analysts at BNP Paribas. “The company has not seen any benefits of its network integration in its broadband subscriber addition. Jio, on the other hand, continues to report healthy subscriber addition,” they said.

VIL reported EBITDA (earnings before interest, tax, depreciation and amortisation) of Rs 3,650 crore for the quarter ended June 2019. The company’s net loss widened to Rs 4,908 crore, compared with Rs 4,882 crore in the preceding quarter.

Jio added 8.5 million customers in July 2019, slightly higher than the 8.3 million it had added in June 2019, but lower than the average of 10 million in FY19. Bharti Airtel and Vodafone Idea lost 2.6 million and 3.4 million subscribers on a month-on-month basis, respectively.

“IUC cut-off, if deferred, will be a positive for Voda Idea. Thirty percent of Voda Idea EBITDA is led by net IUC revenues and this was an overhang on the stock. It will be negative for Jio as it pays about 18% of its EBITDA as IUC charges. For Bharti, the positive impact is 5%,” said analysts at Jefferies.

Trai’s rationale behind making IUC charges zero is that once most telcos switch to VoLTE-based 4G network, the mismatch between Jio and incumbent operators would go in a couple of years, as the cost of terminating calls is very low and can be absorbed by operators.

However, with the shift to 4G network remaining slow, Trai last week came out with a consultation paper on whether the January 2020 timeline to move to zero IUC charges should be changed. According to the regulator, barring Jio, which has 100% of its voice traffic on VoLTE, the similar proportions for Bharti and Voda Idea are still just 18% and 5%, respectively.

“4G subscriber penetration in India still stands at 45%. Further, even though the off-net incoming:outgoing traffic asymmetry has been decreasing across operators, it still prevails (60:40 for Voda Idea, 55:45 for Bharti, 35:65 for Jio),” analysts at Citi Research said.

So far, incumbent operators have opposed Trai’s move stating that there is an imbalance between incoming versus outgoing calls between Reliance Jio and the incumbents. However, though the disproportion between incoming versus outgoing calls has reduced in the last two years, it still exists, and therefore a move to completely do away with IUC charges is likely to be opposed by the incumbents.