Reliance Jio eyes windfall from bill and keep model even as Bharti Airtel, Idea see whopping losses in offing; check out game changer BAK

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New Delhi | Published: September 7, 2017 6:13:56 AM

With prospects of a bill and keep model not ruled out in the new interconnect usage charge regime that the Telecom Regulatory Authority of India is shortly going to unveil, incumbent operators like Bharti Airtel and Idea Cellular would be hit hard.

Reliance Jio , Bharti AirtelFor Reliance Jio it would mean a saving of nearly Rs 7,000-7,500 crore in its interconnect bill on a quarterly basis.

With prospects of a bill and keep model not ruled out in the new interconnect usage charge regime that the Telecom Regulatory Authority of India (Trai) is shortly going to unveil, incumbent operators like Bharti Airtel and Idea Cellular would be hit hard.

According to rough estimates drawn up by Kotak Institutional Equities, if the mobile termination rate (MTR) is made zero or what is called bill and keep (BAK), for Bharti Airtel it would mean a direct hit of 10-11% or Rs 1,800-2,000 crore to its wireless Ebitda (earnings before interest, taxes, depreciation and amortisation) per quarter. Similarly, for Idea Cellular the hit would be around 16-17% or Rs 1,100-1,200 crore per quarter.

However, for Reliance Jio it would mean a saving of nearly Rs 7,000-7,500 crore in its interconnect bill on a quarterly basis.

The wireless Ebitda of Bharti and Idea are on a declining trend sequentially since the April-June quarter of FY17, which was the pre-Jio launch period. For instance, in Q1FY17 Bharti’s wireless Ebitda was at Rs 6,400 crore which declined to around Rs 4,400 crore in April-June quarter of FY18. Jio had launched its services on September 5 last year.

Though Trai is yet to come out with the new termination rate, which currently is 14 paise per minute, speculation is rife that it can be made BAK since earlier this week the Delhi High Court dismissed Vodafone’s plea that Trai disclose to operators its costing methodology. Though the dismissal doesn’t mean that Vodafone or any other operator cannot challenge the new rates, it surely paves the way for Trai to go ahead with its methodology without any pressure to justify it to the operators.

In any case, even if the termination rate is not made zero, it is surely going to be reduced to around 7-8 paise per minute instead of being hiked to around 30-35 paise per minute as being asked by the incumbents. Jio, on the other hand has been demanding a BAK model.

According to Kotak’s estimates, even if there’s a 50% cut in termination rates for Bharti, this would mean a direct 5.5% hit to its Ebitda and 8-9% for Idea. Quite the contrary for Jio, it would mean annualised saving of Rs 2,700 crore. Kotak has estimated that Jio’s net interconnect bill currently runs at around Rs 4,500 crore per month.

Termination charge is paid to the operator on whose network the call terminates by the originating network. This charge has been declining for the last several years. However, the entry of Jio last year and its free services led to asymmetric calls — around 92% calls from Jio terminate on the networks of incumbents while only 8% calls of the latter terminate on Jio’s networks.

This has led to demands by the incumbents to raise the termination charge as it is below cost, which has led Jio to choke their networks. If the charges are hiked, incumbents would get more as termination rate from Jio and they feel this would act as a deterrent for Jio to continue with free calls. However, if the charges are lowered it would be beneficial for Jio as its outgo towards termination would get reduced.

Kotak also notes this point by stating, “Indirect impact could be increased pricing aggression from RJio on the back of these massive savings.”

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