Goldman Sachs, Bank of America cheer for RJio on IUC cut; explain how deeply Airtel, Idea are hurt

By: | Published: September 20, 2017 10:18 AM

Top research firms Goldman Sachs and Bank of America Merrill Lynch say that the IUC rate cut augurs well for Reliance Jio, while the competitors Idea and Bharti Airtel may be severely impacted, as their annual cash flows are likely to take a deep plunge.

Reliance Jio, Trai, Vodafone, Idea, Airtel, AmbaniGoldman Sachs has revised its estimates upwards for the shares of India’s most valued company to Rs 905 from earlier Rs 875, as the research firm sees 0-400 million increase in EBITDA for Reliance Jio after the IUC cut. (Image:Reuters)

After India’s telecom regulator, TRAI  cut interconnect usage charge (IUC) to 6 paise a minute from October 1, from the earlier 14 paise per minute, top research and brokerage firms Goldman Sachs and Bank of America Merrill Lynch say that the move augurs well for Reliance Industries, while the competitors Idea and Bharti Airtel may be severely impacted, as their annual cash flows are likely to take a deep plunge.

Goldman Sachs has revised its estimates upwards for the shares of India’s most valued company to Rs 905 from earlier Rs 875, as the research firm sees $250-400 million increase in EBITDA for Reliance Jio after the IUC cut. Reliance Industries shares were trading up at Rs 855.23 on NSE this morning, up by more than 2.5%. The shares have returned more than 54% in the year so far, as against BSE Sensex returns of 21%.

Goldman Sachs estimates that Bharti Airtel’s cash flows will reduce by more than $150 million due to the rate cut. In a statement by the company this morning, Bharti Airtel said, “We are extremely disappointed with the latest regulation on the IUC, especially at a time when the industry is facing severe financial stress. The suggested IUC rate, which has been arrived at in a completely non-transparent fashion, benefits only one operator which enjoys a huge traffic asymmetry in its favor. ” Bank of America Merrill Lynch has estimated that Bharti Airtel’s consolidated EBITDA will be lower by 2-5% till Financial Year 2021. According to the global firm’s estimates, IUC contributes to 10-15% of  EBITDA of the company. Bharti Airtel shares plunged by more than 2.33% on the news and were trading at Rs 385.6. The shares have shed more than 6% in the last one month.

Goldman Sachs estimates that the IUC cut will cause a heavy $250 million dent to the annual cash flows of Idea Cellular. As per Bank of America Merrill Lynch’s estimates, IUC contributes to 10-15% of  EBITDA of the company. The shares were trading at Rs 79.6, down by more than 4.33%.

With this development, the telecom sector is set to undergo further financial stress. Rajat Sharma, an analyst with Sana Securities, believes that the telecom space is fundamentally weak, and has very limited avenues to augment revenues. “The companies are fighting a fierce battle to no avail, the customer seems to be the only one to benefit,” he told FE Online last month.

 

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