Telecom Regulatory Authority of India’s (Trai) decision to extend interconnect usage charges comes as a relief for incumbents Bharti Airtel Ltd and Vodafone Idea Ltd. But the benefits will not significantly alter the financial position of these telecom companies.
Before the recent tariff hikes, around 30% of operating earnings of Vodafone Idea was estimated to have been contributed by mobile termination revenues. For Bharti Airtel, this was pegged at 3-5%.
But the recent tariff hikes have notably expanded the potential operating earnings base of these companies reducing the relevance of the mobile call termination charges. “Post the recently announced price increase, on an increasing Ebitda base and declining termination charge, the benefit for Bharti Airtel/Vodafone Idea would reduce to 2%/10% in FY21, while the impact on Reliance Jio would be ~4%,” analysts at Motilal Oswal Financial Services Ltd said in a note.
Analysts at Jefferies India Pvt Ltd concur with the view. According to their estimates, the extension of interconnect usage charges will help Bharti Airtel and Vodafone Idea’s operating earnings by 1% and 10% respectively in next fiscal – 2020-21.
The marginal upside aside, the charges would anyway turn to zero from six paise per minute currently from 1 January, 2021.
Of course the incremental revenues will provide notable relief for the cash strapped Vodafone Idea. Similarly, the additional revenue will aid Bharti Airtel. But for investors eyeing a quick repair of the sector, the remedial measures are slow in coming.
Competition and focus on customer addition by industry leader Reliance Jio remains high. Unless Vodafone Idea infuses large amount of equity and beefs up its network, analysts fear substantial market share loss for the company.
The situation is better for Bharti Airtel, but only marginally. The spectrum and license fee dues can exert substantial financial burden unless the company raises fresh funds from investors. “Recent fund raising plans by Bharti Airtel would address AGR (aggregate gross revenue) liability along with ~5% equity dilution. Vodafone Idea may continue facing market share loss and insufficient free cash flows to manage operations,” analysts at Motilal Oswal add.
