Telecom stocks rallied on Thursday on hopes that Reliance Jio Infocomm Ltd’s unconventional tariff move may enable other operators to raise tariffs too. Reliance Jio said on Wednesday that due to undergoing regulatory policy changes for Interconnect Usage Charge (IUC), it is compelled to recover IUC from non-Jio users and hence post 10 October, all calls to non-Jio mobile numbers will be charged at 6 paise per minute.
Shares of Bharti Airtel and Vodafone Idea Ltd ended 5-6% higher while Reliance Industries Ltd (RIL) was up nearly 3% on Thursday.
Analysts believe the tariff hike from the price-setter is positive for the telecom industry and will provide other operators leeway to raise their charges proportionately. However, analysts were cautious that the way the price increase has been taken is perplexing considering it may cause inconvenience and anxiety to subscribers.
According to Nomura, RJio’s move is a step to pressure the Telecom Regulatory Authority of India (Trai) to keep unchanged the current plan of making IUC charges zero from 1 January 2020. In September 2017, by a change in regulation, Trai reduced the IUC from 14 paise to 6 paise per minute effective 1 October 2017 until 31 December 2019. It had further prescribed a bill-and-keep (BAK) regime, i.e. zero IUC or termination charge effective, from 1 January 2020. However, on 18 September 2019, the regulator floated a consultation paper to review the implementation of the zero IUC regime from 1 January 2020, following representation from some stakeholders.
Analysts at Nomura said in the near term, the move will likely boost average revenue per user (Arpu) but, more importantly, it could make the regulator rethink its move to defer implementing the zero IUC regime from the current plan of 1 January 2020. It said that if free calls from Jio subscribers to 2G subscribers of other operators reduce, the pace of subscriber switch (from 2G of incumbent operator to Jio) could increase further.
“We currently assume no IUC charges for domestic calls from Q4FY20. While Jio’s IUC charges are on a declining trend, these are still very high ( ₹850 crore in 1QFY20). We estimate that if IUC charges were to continue beyond 1 Jan 2020, nearly ₹2500-3000 of Jio’s FY21 Ebitda could be at risk," Nomura said in a report on 10 October.
According to Kotak Institutional Equities, at roughly 6.6 paise/min charge, this would mean incremental revenues of ₹1,790 crore per quarter. “One needs to adjust for the ₹720 crore IUC cost that was assumed to be going down to zero. Net revenue uplift would be ₹1,070 crore a quarter or ₹4,300 crore per annum. ..So, gross Arpu uplift of ₹19 per subscribers per month, assuming no price elasticity on off-net volumes," Kotak said in a report on Thursday.