Telecom Regulatory Authority of India (Trai) has announced new interconnect rates. The Termination rate (MTR) on domestic calls has been lowered to 20p/min from 30p, while that on incoming ILD calls has been increased to 40p from 30p.
The ceiling on carriage rate for NLD calls has been retained at 65p. Among these changes, the last two changes have exceeded our expectations. These new rates are applicable from 1 April 2009.
We estimate the pro forma EBITDA/EPS impact of MTR cut for Bharti at 1.1%/ 1.8% and for Idea at 2.1%/5.4%. Our current estimates factor 10p MTR cut for Idea but not for Bharti.
We expect MTR cut to be slightly negative for VOD, neutral for RCOM and positive for BSNL; BSNL’s FL network is a net-payer of interconnect charges.
Separately, the impact of a 10p increase in ILD termination rate will be positive for all access providers, with additional revs being higher for larger operators, such as BSNL / Bharti / RCOM / VOD.
Surprisingly, the Trai has decided not to lower the ceiling on NLD carriage rate; key beneficiaries are BSNL, Bharti and RCOM.
A 25p cut in NLD ceiling rate would have knocked off ~1% from Bharti’s consol. EBITDA. Finally, a reduction in ceiling on transit charge to 15p from 20p will be marginally positive for all, except BSNL.
We believe operators are unlikely to reduce tariffs on back of MTR cut unless forced by new entrants (RCOM, Aircel). However, a 10p cut doesn’t give enough leeway to new entrants to adopt disruptive pricing.
With good growth visibility and no major regulatory overhangs over 6 - 9 months horizon, telecom stocks are likely to OUTPERFORM in our view.