The war for the reduction of Interconnect Usage Charges (IUC) is heating up in the country at the moment. Bharti Airtel, Vodafone India, and Idea Cellular have requested for an increase in the IUC charges, which currently stands at 14 paise/min. However, it was recently reported that Trai had dismissed incumbent telcos’ demand that the interconnect usage charge (IUC) be fixed as the minimum price of a voice call at 14 paise per minute.
IUC or interconnect usage charge is a fee that the caller’s operator needs to pay to the other operator if a mobile call terminates at the latter’s network. For example, if you are an Airtel customer and make a call to a Vodafone subscriber, and Airtel has to pay 14 paise per minute of IUC to Vodafone for the call.
Analysts now say that a fall in the IUC is likely to hit the operating profits of Bharti Airtel and Idea Cellular. However, Reliance Jio will be benefitted from the move.
Reliance Jio has been looking for a predatory IUC charges termed as Bill and Keep Regime, which incumbent operators are not ready to deal with. Bank of America-Merrill Lynch said in a recent note that Jio would be a major beneficiary of any material cut in IUC, as “its net interconnect payments could come down materially, helping it to achieve EBITDA (earnings before interest, tax, depreciation & amortisation) break-even earlier than expected”.
If Trai reduces the IUC charges to 5 paise/min, Bharti Airtel and Idea Cellular's EBITDA will take a 4% and 9% hit respectively. If Trai goes with Reliance Jio's proposal and removes the IUC charges, the EBITA of Airtel and Jio will be down by 6% and 15% respectively, says a report of ET.
"A telco’s EBITDA is a key financial indicator of its operating profit or the money it makes before paying taxes, interest on loans and accounting for depreciation and amortisation," adds the report.
Rajiv Sharma, HSBC director and telecoms analyst, recently said in a note that “Jio’s business model works best in a zero IUC regime as it offers unlimited data and free voice, while its margins are capped when the IUC is above zero.”
Brokerage UBS also added its voice on the IUC charges saying “over .`25-30 savings per customer if IUC rate is cut from 14 paise per minute to 8 paise," which will lower the prices of tariff plans.
If Trai follows the request of incumbent operators and increases the IUC charges to 35 paise, then Reliance Jio will end up paying more charges than the other operators. Trai will take a decision on the IUC charges by the end of this month.