Once is happenstance, twice is coincidence and three times a certainty. With three rulings by the Telecom Regulatory Authority of India (Trai) going against incumbents, investors have come to the conclusion that regulatory risk is not only rearing its ugly head but is rather standing tall over large Indian telecom operators.
As if the tariff war and the resulting cash burn weren’t bad enough, investors are having to contend with one regulatory blow after another. “It’s an obvious risk investors need to factor in while investing in Indian telcos," an analyst at a multinational brokerage firm said on condition of anonymity.
The latest in the series of regulatory woes for the incumbents is Trai’s tariff amendment order, which puts strictures related to predatory pricing on companies with revenue and subscriber share of over 30%, but leaves out firms that have a high share of volumes. As a result, incumbents can at best match tariffs set by Reliance Jio Infocomm Ltd, which according to an industry lobby impedes on their ability to effectively defend their market share.
The biggest regulatory blow was the sharp cut in interconnection usage charges (IUCs) effective 1 October 2017. Analysts at Kotak Institutional Equities wrote in a 7 February note to clients that the difference between Bharti Airtel Ltd’s India wireless Ebit (earnings before interest and tax) and Jio’s Ebit swung from a positive Rs880 crore in Q2 to a negative Rs1,270 crore in Q3. About 80% of this was due to the IUC cut, they estimated.
As pointed out in this column, Jio was the only Indian telco to report a pre-tax profit in Q3.
A few months after the setback on IUC, incumbents also had to contend with Trai’s decision to cut international termination rates (ITRs). The move is expected to shave off another Rs2,000 crore from Indian telcos’ revenue pie and is estimated to impact the Ebitda (earnings before interest, tax, depreciation and amortization) of incumbents between 2.5% and 5%. Some analysts estimate that the ITR cut and the fresh assault on tariffs by Jio last month will drag Airtel to losses at the Ebit level in Q4.
In other words, there are no signs of respite yet for Indian telcos, and regulatory risk is rubbing salt into their wounds.