With it's cup of debt burden woes already brimming, the telecom industry continues to battle the intense competition from new-entrant Reliance Jio. Recently, the TRAI reduced the interconnect usage charge (IUC) from 14 paise per minute to six paise per minute. IUC are charges paid by operator companies for voice calls terminating from a different operator's network.
The 57% reduction in IUC is the steepest drop till date. TRAI has proposed phasing it out the IUC by 2020. This is another blow for industry players, as India has one of the lowest IUC rates in the world. Globally, the IUC rates continue to be gradually phased out.
Coming back to the domestic telecom industry, the IUC rate cut is expected to adversely impact established players like Bharti Airtel and Idea Cellular. What this means is that these companies would no longer be able to enjoy additional revenues from having a large subscriber base thereby impacting their profitability and debt servicing capability. At the same time this development would entail significant cost savings for entrant Reliance Jio.
The bigger worry for the industry is that if Jio passes on the IUC savings to subscribers then it will further depress realisations for established telecom companies. Moreover, Jio would also be launching its 4G phone at competitive rates that would enable it to capture a large share of subscribers who use plain feature phones. This in turn is likely to intensify competition and put pressure on profitability of telecom companies further deepening the stressed loan crisis in the banking industry. The red flag in the telecom industry is being raised by none other than the country's largest lender, State Bank of India. As per the chairman of the bank, the telecom sector is undergoing a lot of stress and the bank is extra provisioning for this.
Data Source: Business Standard, UBS Global Research