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Reliance Jio, GST and IUC sink telecom margins

By the end of the year, GST and the IUC cut would have eroded Airtel and Idea Celullar’s margins by 12.5 and 14 percentage points,  respectively, from the year-ago June quarter, or before Reliance Jio began its services. Photo: Mint (Mint)Premium
By the end of the year, GST and the IUC cut would have eroded Airtel and Idea Celullar’s margins by 12.5 and 14 percentage points, respectively, from the year-ago June quarter, or before Reliance Jio began its services. Photo: Mint (Mint)

As if the Reliance Jio onslaught wasn’t enough, margins of telecom firms, including Airtel and Idea Cellular, will be hit by GST and the IUC cut

Everything seems to be going wrong for telecom companies at the same time. As if the sharp erosion in tariffs wasn’t enough, margins will be hit significantly again by the goods and services tax (GST) and the cut in interconnection usage charges (IUC).

Vis-à-vis the earlier service tax rate, the GST rate is three percentage points higher. And considering that the majority of the sector’s revenues accrue from prepaid subscribers, where passing on the increase in taxes is out of question in the current hyper-competitive environment, analysts expect profit margins to be hit by about two percentage points on account of GST.

The impact on profit margins on account of IUC is estimated to be a little over 200 basis points as well. In the year till June 2017, Ebitda (earnings before interest, tax, depreciation and amortization) margins of Bharti Airtel Ltd and Idea Cellular Ltd had narrowed by 8.3 and 9.6 percentage points, respectively, thanks to Reliance Jio Infocomm Ltd’s aggressive pricing strategy.

By the end of the year, when the impact of changes in both GST and IUC are baked in, margins of these companies would have likely dropped 12.5 and 14 percentage points, respectively, from the year-ago June quarter, or before Reliance Jio began its services.

This will drag Idea deeper into losses at the pre-tax level, and Bharti Airtel, too, is likely to report losses soon for its India wireless business.

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