Jio's interconnect usage charge action could lead to re-rating for sector

Jio's move is seen as a step to recover costs; ARPUs may have bottomed out

The stocks of Reliance Industries and incumbent operators Bharti Airtel and Vodafone Idea gained between 3 per cent and 6 per cent each, on expectations that Reliance Jio’s decision to charge customers for calls made to other mobile networks is an indication that the worst on the pricing front is now behind for the sector. 

Jio announced on Wednesday that customers would pay 6 paise per minute for calls to other operators as long as the interconnect usage charge (IUC) is in place. While the Telecom Regulatory Authority of India (Trai) is holding consultations on IUC, the charge was slated to be abolished from January 1, 2020. 

Given Jio’s outgoing voice calls to other networks were free, the proportion of outgoing to incoming calls were skewed towards the former. The firm ended up paying incumbents for calls originating from its networks. In the June quarter, Jio paid about Rs 850 crore as IUC to competition. 

Shashi Bhusan and Santosh Sinha of Axis Capital believe Jio’s move to pass on the IUC to customers is a re-rating trigger for the sector, as it structurally changes the course of average revenue per user (ARPU). The move by Jio, which has been dictating prices, is also seen as a positive; it will allow incumbents to hike proportionately, especially in the unlimited bundle plans. The impact on the sector will be even more favourable if Trai chooses to retain the 6 paise per minute IUC charge. 

Analysts at Kotak Institutional Equities believe ARPU for Jio could rise by Rs 15, while that for Vodafone Idea and Bharti Airtel wil be in the range of Rs 6-8 each. Jio’s ARPU in the June quarter stood at Rs 122. 

While Jio has indicated there is no increase in tariffs and users will be compensated with higher data, analysts say the sector is finally coming to terms with higher costs. 

CLSA, in a note, said the move was aimed at recovering costs rather than raising tariffs, as there has been no change in existing tariff plans. If the regulator goes ahead and defers the zero-IUC plan, Jio’s operating profit is estimated to get a 40 per cent boost. 

However, the introduction of the IUC charge by Jio could lead to shrinking of price discounts it enjoys over incumbents. While discount reduces from 25 per cent to 15-20 per cent for 28-day plans, it is in line with those of incumbents for 84-day plans, compared to a discount of 13 per cent earlier.  

Given the focus on recovering costs, analysts expect price uptick across the sector in FY21. 

While there will be higher costs on account of network expansions, analysts believe revenue growth from price hikes will be more than incremental, thus having a positive impact on the operating profit. 

While incumbents have already taken steps such as weeding out bottom-of-the-pyramid low ARPU customers, analysts now expect Jio to focus more on profitable growth and not just subscriber additions. 

Edelweiss Research expects Jio to take further tariff hikes for higher payouts towards infrastructure investment trust, to fund incremental capital expenditure for its fibre-to-the-home business and bring down net debt. While the near-term risk for incumbents continues to be Trai sticking to its earlier stand of zero IUC, the Jio price hike indicates the worst is over. However, investors should not jump in and buy, as balance sheet repair and improvement in ARPUs will be gradual and a hike, if any, is at least a couple of quarters away.