Fitch said that drop in interconnect charges will result in significant cost savings for Jio.
Reliance Industries or RIL shares surged nearly 4 per cent to record high of Rs 872 after telecom regulator slashed the interconnect charges, a move which analysts say will benefit Reliance Jio, the telecom venture of the oil-to-retail-to-telecom conglomerate. Telecom regulator TRAI on Tuesday more than halved the fee that mobile carriers pay for calls made from one network to another, which could hurt leading operators including Bharti Airtel Ltd. However, Reliance Jio, which offers free outgoing calls, will benefit from the move as it has more outgoing calls to third-party networks, according to Morgan Stanley analysts.
Here are 10 things to know about RIL share price surge today:
1) In a report Fitch Ratings said: "The financial performance of India's main incumbent telcos will be undermined by the regulator's plan to reduce the mobile termination rate (MTR) by 57 per cent to 6 paise with effect from October 2017 and to remove it completely by January 2020."
2) "In contrast, the move should bring significant cost-savings and lead to faster-than-expected EBITDA (operating profit) break-even for recent entrant Reliance Jio, a subsidiary of Reliance Industries." Fitch added.
3) Fitch further added that the move will result in a transfer of $500 million-$600 million per year from incumbents to Jio.
4) Operators pay the fee when one of their customers makes a voice call to a user on another network, with the fee going to the operator on which a call terminates.
5) Operators with large subscriber bases tend to be net recipients of these interconnection fees.
6) Bharti alone received about $75 million in interconnection revenue from Jio in April-June 2017, according to Fitch.
7) Fitch expects the fee cut "to reduce the EBITDA (operating profit) of the main incumbents - Bharti Airtel, Idea Cellular and Vodafone India - by 3-6 per cent in the financial year ending March 2018 (FY18). This will place further pressure on these companies, which are already facing unprecedented competition from Jio."
8) The removal of the interconnect fee in 2020 is likely to have a much smaller impact, according to Fitch. "Jio's net payment of interconnections fees to incumbents will fall as its subscriber base grows, and we believe asymmetry will be minimal by 2020," Fitch said.
9) Fitch maintains a negative outlook on the Indian telecoms sector. "Jio is likely to roll out other offers to increase its subscriber base over the next two years, and the incumbents are likely to continue to respond with price cuts, discounts and promotions of their own. As a result, industry-wide mobile blended average revenue per user is likely to fall to around Rs 150 by March 2018, down 5 per cent from March 2017."
10) Vodafone India, the second-biggest carrier, described the move as "retrograde" and said it could affect investment in network coverage in rural areas. Bharti Airtel also expressed disappointment over the regulator's decision. Shares of Bharti Airtel fell as much as 6.25 per cent but later recovered to close 0.52 per cent higher at Rs 396.85. Idea Cellular shares and Reliance Industries shares closed 3.66 per cent lower at Rs 80.15 and 1.02 per cent higher at Rs 847.15 respectively in afternoon trade.