Analysts upgrade EBITDA, revenue estimates for RJIO post IUC charge

Analysts feel most subscribers will view the compulsory IUC top-up voucher as an additional spend for no incremental value

Analysts have revised upwards their estimates for earnings before interest, taxes, depreciation and amortisation (EBITDA) and revenue for Reliance Jio (RJIO), the telecom arm of Reliance Industries (RIL) after it hiked the interconnect usage charge (IUC) by 6 paise per minute. The IUC hike by RJIO, analysts say, would pave the way for the other telecom operators to adopt a similar strategy. 

The Mukesh Ambani-controlled telecom company, however, plans to compensate the users for this hike by offering them 1 GB to 10 GB free data. This move, however, came in as a surprise for analysts, who feel most subscribers will view the compulsory IUC top-up voucher as an additional spend for no incremental value.

“The other aspect we find puzzling is the mode chosen to recover the off-out IUC instance. This dilutes the ‘simplicity’ proposition of Jio’s pricing architecture, one of the most critical changes Jio brought to the industry, in our view,” wrote Rohit Chordia and Aniket Sethi, analysts tracking the sector at Kotak Institutional Equities in a report.

On the other hand, analysts at Edelweiss Securities expect RJIO to resort to further hikes for higher payout towards InvIT—to fund incremental capex for its fibre-to-home (FTH) business and bring down net debt. For RJIO, they expect additional charges to drive up revenue by around 5 per cent, which would translate into nearly 10 per cent increase in EBITDA.

“RJIO’s tariff hike is prima facie positive for the industry as it enables other operators to raise tariffs too. We are already building in around 4 per cent higher Q4FY20 average revenue per user (ARPU) for Bharti Airtel and Vodafone Idea than Q1FY20," wrote Pranav Kshatriya, Sandip Agarwal and Nisha Jain, analysts tracking the sector at Edelweiss.

At the bourses, telecom stocks remained outperformers on Thursday, with the S&P BSE Telecom index rallying over 3 per cent in intra-day deals. In comparison, the S&P BSE Sensex traded nearly 0.6 per cent weak. Among stocks, Idea, Bharti Airtel, OnMobile and Reliance Communications (RCom) gained in the range of 1 per cent to 5.3 per cent in intra-day trade.

According to reports, Jio pays net-IUC charges at the rate of 6 paise per minute and has paid cumulative IUC charges of Rs 135 billion since it commenced operations. While these charges are on declining trend, they remain high and stood at Rs 8.5 billion in Q1FY20. 

Analysts at Nomura believe the key reason for RJIO to introduce a recovery of IUC charges is to pressure the regulator into not deferring the current plan of implementing zero IUC or bill-and-keep (BAK) regime from January 1, 2020. That said, it expects JIO's ARPU to gradually increase as subscribers will need to purchase top-up IUC vouchers when they recharge next.

"While the IUC top-up will likely inconvenience customers and increase their monthly outgo, we do not see many customers moving out of Jio due to these IUC charges. We estimate that an ARPU increase of even Rs 10/month could result in additional annualised revenue of over Rs 42 billion. But this would be partly offset by net IUC charges if these were to continue beyond January 1, 2020," wrote Anil Sharma and Aditya Bansal, analysts tracking the sector at Nomura in a report.

Those at Jefferies, too, see gains accruing for RJIO post this move, but see the telecom regulator, TRAI, setting a sunset date for IUC in the next 12 – 18 months.

“If IUC continues until FY21-end, the move will lead to 10 per cent increase in ARPU for Jio, around 20 per cent increase in EBITDA, and around 5 per cent rise in consolidated EBITDA. Cumulative gains will be Rs 73 billion. The benefits of the current move for incumbents is unclear. We expect Jio's focus to remain on subs and sustainable price hikes until it crosses 40 per cent market share (in FY21). Competitive intensity is likely to remain high. Remain cautious on Bharti and VodaIdea,” their analysts wrote in a recent note.

RJIO - Access / IUC charges (net) trend
Period	Rs billion
Q2FY18	21.4
Q3FY18	10.8
Q4FY18	10.7
Q1FY19	10.6
Q2FY19	10.5
Q3FY19	10.1
Q4FY19	11
Q1FY20	8.5

R-Jio's net IUC had declined sharply in 3QFY18 as IUC was cut from
14paise to 6paise per minute from 1 Oct 17; these have been on a
declining trend, and declined to Rs 8.5bn in 1QFY20; with planned
zero IUC regime from Jan 1, 2020; IUC on domestic calls were
expected to become negligible from 4QFY20F; Source: Nomura report