What Reliance Jio’s U-Turn On Voice Calls Signals For Telecom Industry

Reliance Jio Infocomm Ltd. will now start charging customers for voice calls to recover interconnection usage charges, going back on its promise to keep voice calls free on its network.

On Wednesday, the Mukesh Ambani-controlled telecom firm said that it will charge customers 6 paise per minute for voice calls made to other phone networks. Users, however, will be compensated with free data of similar value.

Watch | Jio To Start Charging For Voice Calls For First Time

Reliance Jio, in a press release, said it “has been compelled, most reluctantly and unavoidably” to do this after the telecom regulator’s decision to review the date for scrapping IUC from Jan. 1, 2020.

The move comes three years after Ambani, during the launch of the wireless carrier in 2016, assured users that Jio voice calls across India will never be charged.

A telecom operator pays IUC for connecting calls of its subscribers to a rival network.

Reliance Jio has paid around Rs 13,500 crore as net IUC to other operators since its launch. In the first quarter ended June, Reliance Jio paid a net IUC of Rs 720 crore—15.4 percent of its earnings before interest, tax, depreciation and amortization. But after charging subscribers, the benefit will be higher as it would recover gross IUC.

Say, for instance, Reliance Jio had incurred a gross IUC of Rs 100 for calls made to Bharti Airtel Ltd., while Airtel incurred a gross IUC of Rs 50 for calls made to Reliance Jio’s network. Then on a net basis, Reliance Jio would have to pay Airtel Rs 50.

But now as Reliance Jio is recovering the entire IUC amount from subscribers without giving them any net-off benefit, it will earn Rs 100.

A Reliance Jio, official who didn’t wish to be named, said there is a regulatory issue when it comes to passing the benefit to consumers on net IUC basis and the company has sought relaxation from the regulator on accounting and levies.

These charges, according to India’s youngest telecom operator, will not be applicable on calls made to other Reliance Jio users. Incoming calls from all networks will also remain free.

Jio’s Gain

By introducing these charges, Reliance Jio is trying to pass on the gross IUC cost to consumers which may boost its Ebitda and margins, said Rajiv Sharma, telecom analyst and head of Institutional Research Equities at SBICAP Securities. The move, he said, could help other operators as they might choose to not charge customers, keeping their plans simple and tariffs lower. Sharma, however, said it will be difficult to gauge other telecom operators’ move at this moment.

Edelweiss, too, expects additional charges to boost Reliance Jio’s FY20 revenue and Ebitda by 5 percent and 10 percent respectively. “We believe that additional charges for off-net calls would disincentivise users to call other operators, which would reduce off-net call volumes for Jio,” the brokerage said.

The tariff hike from the price-setter, however, is positive for the telecom industry and will provide other operators leeway to hike prices proportionately, it said.

In 2017, the Telecom Regulatory Authority of India cut IUC to Rs 0.06 per minute from Rs 0.14 per minute and had decided to abolish the charges from Jan. 1, 2020.

If the scrapping of IUC is deferred, it will benefit Airtel and Vodafone Idea Ltd. in the short term. That’s because telecom operators with large number of active subscribers gain from IUC as most of the calls are made within their network and they earn a good share of revenue from incoming calls from other networks. But Reliance Jio, which has fewer active users compared to peers, continues to remain a net payer.

Bharti Airtel, in an emailed statement, said this off-net charge being levied is geared “to force IUC to be brought down” despite the heavy burden it puts on the receiving network. “We are grateful that this very timely consultation paper to reassess IUC has been issued by TRAI.”

Brokerages’ Take

CLSA

• It may be a temporary measure, which could be reversed.
• Tariff discounts to incumbents will shrink and may drive huge bump in Jio’s profit
• Gross IUC charges could have boosted Jio’s Ebitda by 41 percent in Q1FY20

JPMorgan

• IUC top-up is a large indirect tariff hike, margin accretive and reduce negative cash flow.
• Believe markets would react positively as it would allow investors to gauge willingness of Jio subscribers to pay higher charges.

BofAML

• Consider IUC tariffs as one-off change by Reliance Jio, which could reverse.
• Sentimentally positive for Airtel and Vodafone Idea, but fundamentally do not see any material change.
• Remains to be seen if Airtel and Vodafone Idea take a tariff hike.

UBS

• Reliance Jio’s IUC tariffs positive for the sector
• Positive Ebitda impact could be 13-15 percent for Airtel, 55-60 percent for Vodafone Idea and 32-36 percent for Jio
• Magnitude of positive impact on Vodafone Idea is higher than Airtel and Jio given the base effect

Nomura

• IUC tariff move to likely pressure regulator to implement zero IUC from Jan. 1, 2020.
• IUC top-up may inconvenience Jio customers, but should increase near-term ARPUs
• Traffic imbalance between Jio, Airtel and Vodafone Idea could reduce

Axis Capital

• IUC pass-through may change industry dynamics.
• Move may positively impact FY21 Ebitda of telecom companies by 16-17 percent .
• Believe incumbents will follow Jio in passing on IUC to consumers to improve cash flow.
• See this as a trigger for re-rating the industry as it structurally change the course of ARPU.