Analysts say Trai ruling may end incumbency advantage
A day after the telecom regulator decided to reduce and eventually remove call termination charges, stock brokerages highlighted concerns over the regulatory environment in the sector and the loss of incumbency advantage for established telcos. However, the impact will fade over the medium to long term, they said.
On Tuesday, the Telecom Regulatory Authority of India (TRAI) ordered a cut in interconnect user charges — paid by the telco which originates a call to the one which receives the call — from the current 14 paise to 6 paise, and phasing out these charges by 1 January 2020.
The decision is a setback for incumbent telcos such as Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd and a potential boost for newcomer Reliance Jio Infocomm Ltd.
According to a 20 September report by Goldman Sachs Global Investment Research, the change in regulation does highlight “regulatory risks” in India’s telecom sector, and “investors may question whether any further regulatory change in the telecom sector could negatively affect incumbents.”
According to a 19 September Kotak Institutional Equities Research report, the strong arguments in favour of BAK (bill-andkeep) that TRAI has put forth in the announced IUC cut regulatory document “is a much bigger negative than the quant of the cut”. Jio had advocated the billand-keep model.
We see this development as the second instance of the incumbents being unable to get their (logical to us) view on an important regulatory development accepted. The first instance was renewal of extant spectrum; regulator’s decision to auction in-use spectrum made the renewal auc- tions a business continuity issue and led to hefty spectrum payouts,” the Kotak report said.
The issue of renewing or extending the licences of Bharti Airtel Ltd and Vodafone, India’s top two telecom firms, in certain circles such as Mumbai and Delhi became contentious after the government said that telcos must win back the spectrum they hold to retain their licences.
It led to aggressive bidding in these circles for 900 MHz spectrum, severely denting their financials.
“Each such regulatory decision chips away at any incumbency advantage. Managing the regulatory side of the equation on grey areas like IUC is critical and incumbents have not done a good job here,” the Kotak report added.
Telcos have said that they will challenge the regulation in courts.“Based on past precedents, it is likely that the incumbents would mount a legal challenge to the MTR (or IUC) cut though the probability of any changes in the recommendation is fairly low (based on outcome of previous cases),” Deutsche Bank said. “However, the announcement also resolves one of the last remaining event risks for the companies, especially Bharti,” it added.
According to a report by Motilal Oswal Securities Ltd, with a major regulatory headwind behind, the focus will now shift to execution.
“Bharti has consistently added active subscribers in the last four months, while Idea has protected its market share. We believe RJio’s continued freebie reduction should taper competitive intensity further, driving ARPU accretion in the market,” it said.
Meanwhile, Trai’s decision to cut call connection charge rate by more than half, if executed, will hit earnings of old mobile operators to the tune of ₹5,000 crore in the current fiscal, industry body COAI said on Wednesday.
Rajan S Mathews, directorgeneral, Cellular Operators Association of India (COAI), in an interview to PTI demanded that Trai should explain the calculation model it had used to arrive at the figure of 6 paise. “In the last financial year, industry revenue from IUC at 14 paise was around ₹10,000 crore. At 6 paise, we expect it to decline to ₹5,000 crore,” Mathews added.
The detailed methodology on which Trai’s calculations are based is part of the explanatory memorandum to the regulations all of which have been placed in the public domain now, Trai chairman R S Sharma told PTI.