The three also refute newcomer’s claim that they overly relied on debt rather than using equity.
The issue of predatory pricing by Reliance Jio was flagged as the most immediate cause for financial stress in the telecom sector by the top three incumbent operators — Bharti Airtel, Vodafone, and Idea Cellular — at their meeting with the government-appointed inter-ministerial group on Friday. If left unaddressed, it would not only lead to financial losses to the operators but also revenue loss to the government, reduce the ability of banks to service loan, lead to loss of employment and poor quality of service for consumers, they claimed.
The immediate solution suggested by the three incumbents to the IMG to address the issue of predatory pricing, which they accuse Jio of practising, is to increase the mobile termination rates, which they said was below cost today. The mobile termination charge (MTC) is at 14 paise per minute today and the incumbents want it to be raised to anywhere between 30 and 35 paise per minute to reflect the full cost. Termination rate is paid to the operator on whose network a call terminates by the operator from whose network the call originates. Since almost 92% of calls on Jio’s network is outgoing and only 8% is incoming, a hike to a cost-based MTC would prevent any abuse of low termination rates leading to predatory pricing by it, the operators said. Bharti told the the IMG that Jio lost `450 crore in just the fourth quarter of FY17 on account of paying termination charges to incumbents. The obvious hint was that if raised to reflect the full cost, Jio’s losses would increase and, thus, check its alleged predatory pricing tendencies.
Highlighting that checking predatory pricing should be the immediate agenda of the government, Idea Cellular put data in perspective. For instance, between Q4FY16 to Q4FY17 voice rates of operators fell by between 27% and 35%. Voice revenues declined by between 9.6% and 32.5% and the data rate by between 47% and 50%. What changed between Q4FY16 and Q4FY17 was the entry of Jio with its free services after the second quarter of FY17.
Bharti also countered Jio’s presentation made a few days ago to the IMG where it had said that incumbents were facing financial stress because they were overly relying on debt rather than equity and should infuse more equity by selling their stakes. Countering this, Bharti said that its capex between FY2012-17 was Rs 1,25,000 crore. To fund this it had raised a total debt of Rs 46,000 crore and infused equity from its operating cash flow of Rs 79,000 crore. It said that only Rs 4,000 crore of dividend has been paid out by cash generated from the business while rest has been infused back as equity. It said that it has stepped up investments in its business — capex investments (excluding spectrum) have reached an all-time high of Rs 14,497 crore — which is 23.3% of FY17 gross revenue. By comparison, global telecom operators have invested capex between 13% and 15% of revenue (AT&T 13.4%, Verizon 12.8%, Vodafone UK 14.7%)
Vodafone also countered Jio’s allegation, stating that it has made the largest equity infusion of Rs 54,000 crore since 2015. On its part Idea Cellular said that its new investments are funded through a mix of debt and equity/internal accruals. For instance, Idea said that its net debt as on date stands at Rs 38,484 crore while funding via equity and internal accruals is at Rs 38,643 crore. It said that its total investment since FY14 is to the tune of Rs 77,127 crore, of which Rs 23,235 crore is in capex and Rs 53,892 crore in spectrum.
The incumbents also countered Jio’s suggestion that deferred payment mechanism should be done away with as it leads to irrational bidding for spectrum. Instead, they suggested that the moratorium should be increased and repayment period should be extended beyond the 10-year period and made co-terminus with the licence period, which is 20 years.
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Where the incumbent operators agreed with Jio was on the need to reduce licence fee and spectrum usage charge.