Given that Reliance Jio has already sunk in Rs 2 lakh crore in its telecom
foray, it would have taken a few years for the company to make money. This move by the TRAI, however, puts breakeven at the operating profit level on a fast forward mode.
While it is all positive for Reliance Jio, the incumbent heavyweights stare at an unpleasant future. The Cellular Operators Association of India (COAI) estimates the hit to the the sector from this decision at Rs 5,000 crore.
CRISIL Research estimates revenue growth for the sector to come down by half. Hetal Gandhi, director, CRISIL Research, says, “Revenue growth that could have touched over 10 per cent in 2017-18 will now be lower at 5-6 per cent for the industry. The top three incumbents are expected to bear the brunt of the lower IUC charges with an estimated 6-9 per cent fall in their gross revenues in 2017-18.”
What this translates into is no revenue growth for them in the current financial year. For incumbents, any hopes of growth, given a stable June quarter after two quarters (December and March) of 6-7 per cent sequential revenue declines, have thus gone out of the window.
Bharti Airtel, the largest player in the sector, is upset with the decision, which, according to the company, benefits only one operator that enjoys a huge traffic asymmetry in its favour. The sharp drop in the IUC will only help transfer part of its (Reliance Jio's) cost to other operators, thereby worsening the financial health of the industry, it says.
Given that the IUC is an inter-operator settlement and thus a zero-sum game, reducing it benefits smaller players such as Reliance Jio with an estimated 10 per cent subscriber share. About 90 per cent of calls from the Reliance Jio network are outgoing, thus it pays more to the incumbent operators.
Reliance Jio, however, denies any gains. In a statement on Wednesday, it said, "Jio has always offered free voice services to its customers. There is no question of any advantage from the new IUC regulation to Jio as it has already passed on all the benefits to customers. We deny any benefits to Jio. At a time when the world is moving towards IP-based technologies, cost of voice has come down to a fraction of a paisa and customers should enjoy this advantage."
If Reliance Jio does pass on the additional savings from the IUC cut to customers, it will have an big impact on the incumbents, say analysts.
Rohit Chordia of Kotak Institutional Equities believes that the savings on a 100 million subscriber base translates to roughly Rs 30-35 per subscriber per month. If Reliance Jio, which has been offering disruptive pricing, moves to reduce tariffs further the sector could slip into bigger losses. CLSA in a report says the IUC cut includes a dilution of average revenue per user and subscriber churn given the ramp-up of Reliance Jio’s 4G feature phones and continuing tariff promotions. The research firm believes that estimates of 60 million JioPhone subscribers by March 2018 and 100 million by March 2019 are reasonable. It predicts an 8-10 per cent revenue market share shift in favour of Reliance Jio with the top three incumbents most exposed to the shift.
Reliance Jio is well placed to take market share from smaller players as well as the incumbents. Given this environment, the road ahead just got more difficult for Bharti Airtel and the Idea-Vodafone combine.
However, their ability to introduce VoLTE-based network will help them lower costs, given that IUC will become zero by 2020. On this front, analysts at Bank of America-Merrill Lynch say, "Among incumbents, we find Bharti to be best placed, with its 75,000 plus 4G sites, to launch VoLTE in the coming months. Our checks suggest that Vodafone/Idea are 6-9 months behind Bharti in launching VoLTE." Bharti has already launched VoLTE in Mumbai and a rollout in other cities is expected in the next few months.