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MOSL: TELECOM-IUC reduction to enable RJio to intensify competition-Cut to INR0.10/minute to impact incumbents

TELECOM: IUC reduction to enable RJio to intensify competition; Cut to INR0.10/minute to impact incumbents’ EBITDA by less than 4%

Media reports indicate that TRAI is set to reduce interconnect usage cost (IUC) from the current INR0.14/minute. Though TRAI's consultation paper released in the last fiscal year hints at 'zero' IUC, we expect the regulator to tweak it down to INR0.10-0.12/minute for now.

The key argument in favor of IUC reduction is promotion of IP calling, which has significantly lower cost/minute. However, the incumbents argue against IUC reduction, citing their high operating costs (largely due to high cost of spectrum), potential deleterious impact on network expansion, and the possible tilt in competitive advantage in favor of RJio.

Bharti's EBITDA is likely to be impacted by 3-4% if IUC is reduced to INR0.10/minute and by 10-12% if it is reduced to zero. The impact on Idea would be lower, given its lower market share. The impact of a ~30% cut in IUC now would be higher than the 1-1.5% revenue impact and meaningless EBITDA impact in 4QFY15, when IUC was reduced by 33% to INR0.14/minute.

Why is the regulator looking to cut IUC?

In its consultation paper released in the last fiscal year, TRAI had hinted that IUC could be charged on bill-and-keep (BAK) model, implying zero charge. The arguments favoring IUC reduction are promotion of (a) lower-cost VoLTE/IP-based calling, and (b) efficient network technologies.

IUC has been reduced four times from a high of INR0.50/minute to INR0.14/minute. Globally too, IUC has been reduced by over 50% in many developed markets like Australia, UK, and other European countries.