For Vodafone Idea Ltd’s investors, the Telecom Regulatory Authority of India’s (Trai) rethink on the termination of interconnect usage charges (IUC), effective January 2020, has come as a sigh of relief. The stock surged 12% in early deals on Thursday. Given the many worries about the company’s cash burn and depleting revenue market share, it isn’t surprising that this development is being cheered. Of course, Vodafone Idea shares still trade at only ₹5.45 a piece, which shows that investors’ hopes overall remain low.
Analysts at Jefferies India Pvt. Ltd estimate that 30% of Vodafone Idea’s operating earnings are due to net IUC earnings. So abolition of these charges beginning next year would have dealt severe blow to the company. On the other hand, Jefferies' analysts estimate the move will result in an 18% drag on Reliance Jio Infocomm's operating profits, as it currently has net outgoes due to IUC. A deferment of the IUC termination date will mean it continues to have outgoes on the IUC front.
For Bharti Airtel Ltd, the share of IUC earnings to overall operating profit is much lower, given higher profitability in the remaining India business and contributions from its Africa business. Hence, its shares gained only about 1%.
Pressure on the revenue market share notwithstanding, both Vodafone Idea and Bharti Airtel still have large subscriber base. Together Vodafone Idea and Bharti Airtel have about 64% share in the subscriber base, according to data from Trai compiled by Jefferies India Pvt Ltd. This large subscriber base helps incumbents garner a significant portion of the IUC or the mobile termination charges.
With tariffs and revenues under pressure these mobile termination charges have become crucial lifeline for incumbents, especially Vodafone Idea whose earnings are under pressure.
Of course, the regulator has issued only a consultation paper and the final decision can wary. But as analysts at Motilal Oswal Securities Ltd point out, the fact that the regulator is willing to revisit its earlier decision is a positive. “The paper in fact appears to be in favor of revising the date, listing justifications on the need to deliberate. This is yet in the consultation stage and dates for comments and counter is 18 October and 1 November 2019. Notably, the consultation process last time took nearly 12 months," analysts at Motilal Oswal Securities said.