Reliance Jio (RJio), the largest telecom operator with over 35 crore subscribers, has effected a temporary shift in strategy amid regulatory uncertainty over the phasing out of interconnect usage sharges (IUC). Customers on its network will be asked to pay 6 paisa per minute on outgoing voice calls made to non-Jio networks to recover the IUC which the company pays to other network providers.
IUC is what one mobile telecom operator pays to another, when its customers make outgoing mobile calls to the other operator’s customers.
In this note, we attempt to analyse the impact of additional charges on RJio’s financial performance and the impact on the stock price of Reliance Industries.
Catalyst for raising the tariffs
Earlier, the Telecom Regulatory Authority of India (TRAI) had decided to reduce IUC from 14 paise per min to 6 paise per min effective from October 1, 2017 and further to zero from January 1, 2020.
However, TRAI appears to be having second thoughts on whether to bring IUC down to zero or not, which has led to significant uncertainties for RJio. The company has in all paid nearly Rs.13,500 crore as net IUC charges to other operators.
Therefore, in light of this regulatory uncertainty RJio has decided to recover the IUC cost from its customers. It has, however, assured that this charge will be removed as soon as TRAI implements the zero IUC regime. In fact, RJIo is giving additional data along with the IUC top-up vouchers so that there is no effective tariff increase for the customer till 31st December 2019.
Implications for the sector
There is no direct benefit to Bharti Airtel and Vodafone-Idea from this move, as they would continue to get the same amount of IUC from RJio as earlier. But the decision augurs well for the entire industry, which has seen declining Average Revenue Per User (ARPU). This could lead to acceptance of higher tariffs by customers, thereby giving some leeway to service providers to increase tariffs. RJio, specifically, should be able to see an improvement in its operating margin.
Implications for the company
Back-of-the-envelope calculations suggest that levying IUC charges would lead to Rs3,624 crore incremental benefit in RJio’s EBITDA, approximately 20 percent increment on the basis of annualised Q1 FY20 EBITDA.
What does this mean for the Reliance Industries stock?
The passing on of IUC to customers has been implemented only for one quarter till TRAI phases out IUC charges completely and hence there would not be much impact on the RJio’s financial performance. If IUC is made nil then all companies will be on the same footing.However, if IUC continues to remain in force even after one quarter, then it will mean that RJio will not have to continue to bear the costs of IUC for a longer than expected period. Our conservative SOTP (sum of the parts) suggests that the Reliance Industries’ stock could then get a 4 percentage points bump-up in compared to if the IUC charges were temporary (see chart). Keep a watch on the ongoing developments in this area to know what to expect.
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