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Business News/ Industry / Telecom/  Telcos may post weak Q3 on cut in interconnect usage charges

Telcos may post weak Q3 on cut in interconnect usage charges

Top brokerages expect the revenue of Bharti Airtel and Idea Cellular to decline in the third quarter as revenue from interconnect usage charges has added to their sales historically

Credit Suisse expects Bharti Airtel’s revenue to drop to Rs21,026 crore in October-December, down 9.9% from a year earlier. Photo: Pradeep Gaur/Mint

New Delhi: Telecom operators Bharti Airtel Ltd and Idea Cellular Ltd, which are facing stiff competition after the advent of Reliance Jio Infocomm Ltd, are expected to take a further hit to their earnings for October-December because of the impact of the cut in interconnect usage charges.

Top brokerages expect the revenue of Bharti Airtel and Idea Cellular to decline in the third quarter as revenue from interconnect usage charges has added to their sales historically.

The Telecom Regulatory Authority of India (Trai) had in September slashed interconnect usage charges from 14 paise a minute to 6 paise a minute effective 1 October. Interconnect usage charges (IUC) or mobile termination charges (MTC) are what an operator pays another for landing calls on the latter’s network.

“Our math suggests that mobile termination contributed to as much as 14-15% to Bharti’s India wireless revenues and a similar proportion to the segment’s Ebitda in July-September," Kotak Institutional Equities said in a report dated 1 January.

Ebitda is earnings before interest, taxes, depreciation and amortization.

A 57% cut in mobile termination charges, keeping all other variables constant, should result in around 8% sequential decline in India wireless revenues for Bharti Airtel, Kotak Institutional Equities added.

“Adjusted for IUC cuts, we believe competitive pressure on telcos will continue," Credit Suisse said in a report.

Credit Suisse expects Bharti Airtel’s revenue to drop to Rs21,026 crore in October-December, down 9.9% from a year earlier. On a sequential basis, revenue is expected to fall 3.4%.

For Idea Cellular, IUC’s contribution to revenue and Ebitda in July-September was 14-15% and 20-21%, respectively, Kotak Institutional Equities said in the report, adding that the cut in IUC would mean an 8% decline in revenue and nearly 11-12% impact on Ebitda on a quarter-on-quarter basis.

Credit Suisse expects Idea Cellular’s revenue to drop to Rs6,850 crore in October-December, down 20.9% year-on year. On a sequential basis, revenue is expected to drop 8.2%.

Idea Cellular has been posting a loss for the past three quarters.

Bank of America Merrill Lynch expects a sharper impact of the IUC rate cut on Idea Cellular with its October-December revenue declining 15.4% sequentially.

At the time of Trai’s announcement of the IUC cut, Vodafone and Bharti Airtel had said they were disappointed with the decision as this would worsen the health of the telecom sector.

The suggested rate, which has been arrived at in a “completely non-transparent fashion", benefits only one operator which enjoys a huge traffic asymmetry in its favour, Bharti Airtel had said then, without naming Reliance Jio.

Vodafone India had at that time said that the Indian telecom industry was already experiencing the greatest period of financial stress in its history and this was yet another retrograde regulatory measure that would significantly benefit the new entrant alone while adversely affecting the rest of the industry as a whole.

The cut in interconnect usage charges will help Reliance Jio “generate additional $200-450 million Ebitda during FY18-20," Goldman Sachs had said in a note in September.

CLSA in a September note had said it expects Reliance Jio’s 2018-19 Ebitda to rise by 20% due to the cut in interconnect usage charges.

Interconnect usage charges in India have been brought down over time - from 30 paise in 2004 to 20 paise in 2009, and to 14 paise in 2015.

The IUC will be scrapped from 1 January 2020.

Idea Cellular managing director Himanshu Kapania at the India Mobile Congress in September said the telecom regulator’s decision to cut interconnect charges had created an inter-operator imbalance and would push the sector to a level where only one technology survives.

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