Reliance Jio's move to pass on the IUC (interconnect usage charges) to customers could lead to price hike in the sector believe analysts.
While the quantum of increase in prices is not known at present, analysts are of the view that Bharti Airtel and Vodafone Idea (VIL) will also follow suit. A tariff hike, if any, could improve sector ARPU (average revenue per user) and revenues, however, analysts have been caught by the form in which it will be coming. With Jio recovering IUC from its subscribers, the move would give incumbents an opportunity to hike tariffs too.
Ahead of the consultative process on the review of termination charges (also called IUC), Reliance Jio on Wednesday had announced that it would charge consumers for calls made to other networks. Reliance Jio is a net payer of this IUC since it is a late entrant. It had a net access charge (consisting of IUC charge) of Rs 900 crore in the first quarter ended March 31, 2020.
The move, which comes into effect from Thursday, is contrary to the company's claims at its launch (when termination rate was higher at 14 paise per minute) that Jio consumers would not have to pay for domestic voice calls for life. The company has said it's a temporary charge, and would remain in force till Trai does not move to zero termination rate from January 2020, as announced earlier. According to analysts, extension of IUC deadline will be negative for Jio as it pays about 18% of its EBITDA as IUC charges.
Analysts believe incumbents would follow suit and recover IUC from even their bundled customers who get voice free along with data. According to Jefferies, "Assuming they (incumbents) charge IUC for bundled subs and IUC continues till end-FY21, this implies an 11/15% ARPU rise and 5/40% consolidated EBITDA increase for Bharti/VodaIdea, respectively, in best case," they said.
To neutralise the charge for its consumers, Jio also announced additional data benefits. If a Jio consumer makes calls to a Bharti Airtel or Vodafone Idea network, the 6-paise-per-minute termination charge, which the originating network has to pay to the terminating network, would have to be borne by the Jio consumer. Jio has come out with IUC top-up vouchers in four denominations - Rs 10, Rs 20, Rs 50 and Rs 100 - which would entitle users with free data of 1, 2, 5 and 10 GB, respectively. For postpaid users, the charge for such calls would be adjusted in the monthly bills.
However, analysts said that Jio's decision to go ahead and make the move of passing on IUC charges to customers as "quite puzzling". Expressing disagreement with Jio's move, Kotak Institutional Equities observed that it is not sure "why Jio could not have waited another couple of months for the final outcome". Jio in its press statement had said that it had paid IUC "from its own resources while offering free voice to its customers", for nearly three years now. Jio said since its launch in September 2016 it had to bear Rs 13,500-crore payment to Bharti Airtel and Vodafone Idea as termination charge.
"As a quick aside, we aren't in sync with Jio's views of having paid IUC "from its own resources while offering free voice to its customers". Of the bundled price paid by a customer, any attribution to voice, data, off-out IUC recovery etc. is an arbitrary one," analysts at Kotak Institutional Equities said.
Additional charges for off-net calls would disincentivise users to call other operators, which would reduce off-net call volumes for Jio, said analysts at Edelweiss Securities.
However, these are expected to drive up revenue by 5% for Jio, which would translate into a 10% increase in company's EBITDA. "We believe the tariff hike from the price-setter is positive for the telecom industry and will provide other operators leeway to hike prices proportionately," analysts wrote. While the domestic brokerage anticipated a price hike by Jio in the second half of FY20, it found the way it has been taken as "perplexing considering it may cause inconvenience and anxiety to subscribers".
Analysts at Emkay Global observed that with this move, Jio is taking net price hike of about Rs 20. "In our view, Bharti and VIL will also take hike for its bundled subscribers (43-45% of subs base)," analysts said.
Investors believe price hikes in the sector might continue going forward as well. However, now Trai's move will be key for this price hike beyond December 2019 and stock price movement, analysts at Emkay said.