IUC cut positive for Reliance Jio but may not lower you mobile phone bills: Macquarie

By: | Published: September 20, 2017 7:48 PM

Those cheering IUC cuts in the hope that their mobile tariffs may come down with it, may have to wait a little more to know if the benefits will actually flow to them.

IUC cut is definitely positive for Reliance Jio and kind of negative for the incumbents such as Bharti Airtel, Idea and Vodafone, Macquarie said. (Image: Reuters)

Those cheering IUC cuts in the hope that their mobile tariffs may come down with it, may have to wait a little more to know if the benefits will actually flow to them, with a major research and brokerage firm pointing out to the possibility that the cut in the interconnection usage charges will only lead earlier breakeven for Reliance Jio.

“Definitely, (it is) a good news for Reliance Jio, as currently, their voice is absolutely free so for them, it is a big cost — the IUC (interconnection usage charges), because they are generating a lot of calls, so I think there is going to be cost saving which will allow a faster breakeven as anticipated in the market and maybe that is the case,” Inderjeet Singh Bhatia, Head of Research at Macquarie Capital Securities said in an interview to ET Now.

Bhatia said that it has now become clear that what is the quantum of the cut in the IUC, and by when will it take place. “So that is definitely positive for Reliance Jio and kind of negative for the incumbents such as Bharti Airtel, Idea and Vodafone,” he said. However, at the same time, he also said, “I don’t think that Reliance might look at further cuts in their pricing because they already now have a critical mass of customers in the place.”

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, other 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.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition