TRAI slashes IUC; Recovery of the sector prolonged
ICRA is of the opinion that the latest regulation passed by the Telecom Regulatory Authority of India (TRAI) would adversely impact the larger incumbents over the medium term, and in the process benefit the new entrant Reliance JioInfocomm Ltd. (RJio). The regulation reduces the Interconnect Usage Charges (IUC) on domestic wireless termination charges from the existing 14 paisa per minute to 6 paisa per minute. Further, TRAI has prescribed adopting the ‘Bill and Keep’ (BAK) regime from January 01, 2020, thereby reducing the IUC to zero.
Mr. Harsh Jagnani, Sector Head and Vice President, Corporate Ratings, ICRA Limited elaborates: “At the industry level, IUC is largely a zero-sum but it impacts each operator differently, driven by the extent of traffic asymmetry between them. An operator with higher proportion of off-net incoming minutes over off-net outgoing minutes benefits by way of net inflow of IUC revenues, and vice-versa. While the larger incumbents had always been net earners of IUC revenues, the extent of gain had increased following the launch of services by RJio, with free voice plans leading to higher off-net outgoing traffic from RJio subscribers. Thus, the latest TRAI regulation is expected to translate into savings for RJio in terms of the IUC it had to pay to other operators – as per RJio’s financials, its IUC charges for FY2017 stood at Rs. 2,589 crore, for around seven months of service. “
For the incumbents, competitive intensity prevents any increase in tariffs to meet the shortfall in IUC revenues thereby impacting the EBITDA generation. It is estimated that the decline in EBITDA for the larger incumbents would be in the range of 5-12%.Apart from the immediate impact on EBITDA generation, the industry also faces the challenge of continuation of competitive intensity from RJio, given the headroom it has got from the IUC savings, says ICRA in the release.
The last reduction in IUC was done in February 2015, when the termination charges were reduced by 6 paisa – from 20 paisa per minute to 14 paisa per minute. Since this time the quantum of reduction as well as the proportion of incoming calls is higher, the impact on revenues of the larger incumbents is also expected to be higher. Nevertheless, ICRA is of the opinion that in the longer run, the asymmetry in traffic between the larger incumbents and RJio is expected to reduce,following the reduction in the subscriber base gap between them.Thus the impact of lower IUC would be negated to some extent. Further, the impact of reduction of IUC to zero by adopting the ‘Bill and Keep’ model from 1st January 2020 implies that an operator can charge for incoming voice minutes, but the same is unlikely given the extent of competition and continuous move towards lower pricing of voice.
Mr. Jagnani further adds, “At a time when there are talks ofproviding incentives to the industry, which is ailing with pressure on profitability, elevated debt levels, and continuedcapex requirements, the timing of this reduction in IUC would add to the woes of the industry.This move is likely to keep the competitive intensity for the industry high and prolong the restoration of pricing power, a must for all operators to generate adequate return on investments.”
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