Research reports from BofA Merrill Lynch and CLSA indicate Bharti Airtel, Idea Cellular and Vodafone will be expanding their VoLTE coverage to ensure cost effective voice business after TRAI announced 57 percent cut in interconnection charges.
At present, Reliance Jio has a nationwide presence for offering VoLTE call services with HD quality. Airtel recently announced its VoLTE service in Mumbai. Airtel also indicated that it will expand VoLTE coverage. Airtel is also introducing a cost effective VoLTE phone for Rs 2,500 to take on JioPhone that is available for Rs 1,500.
Sachin Salgaonkar and Karan Parmanandka, research analysts at DSP Merrill Lynch India said VoLTE rollout will be key to keep costs down. The move to a bill and keep (B&K) regime from 2020 would force existing telecoms to upgrade their networks to VoLTE as telecoms would like to migrate their traffic to VoLTE to reduce cost.
The benefit of VoLTE is that the quality of the call is better than 2G and 3G connections and also more data can be transferred over 4G as compared to 2G and 3G. Traditionally, voice networks transmit voice calls using 8 Kbps codec, but VoLTE transmits voice calls using 13 Kbps codec, according to a report in Technovio.
Bharti Airtel is best placed, with its 75,000 plus 4G sites, to launch VoLTE service in coming months. Vodafone and Idea Cellular are 6-9 months behind Bharti Airtel in launching VoLTE.
Though smaller telecoms would benefit from the IUC rate cut, they will be worse placed in the long term as they would unlikely be able to launch VoLTE due to absence of 4G spectrum and accelerate consolidation.
Reliance Jio may use the potential savings from the new IUC regime to improve its 4G coverage from current 120,000 towers to 160,000 and eventually to 200,000 across the country.
CLSA in a report said larger incumbent operators are likely to focus on upgrading their networks to VoLTE at a faster pace to reduce the cost of call termination on their networks.
Deepti Chaturvedi and Akshat Agarwal of CLSA said the reduction in IUC will increase the profitability of unlimited voice calling plans thus incentivising operators to offer them to all subscribers.
While smaller mobile operators will benefit from the lower IUC charge, their inability to upgrade networks is likely to limit their ability to offer unlimited voice plans at lower rates.
IUC Impact
BofA Merrill Lynch estimates that net IUC will contribute 10 percent of Bharti Airtel’s and 15 percent of Idea’s cellular EBITDA. Bharti Airtel’s consolidated EBITDA will be impacted by 2-5 percent and Idea’s EBITDA impact will be 4-13 percent till FY21E. Beyond FY21E, EBITDA of Airtel and Idea will go down by 6-15 percent.
Morgan Stanley India estimates full year impact of ~5 percent EBITDA decline for India wireless business; ~3 percent decline in consolidated EBITDA and ~40 percent decline in PAT.
Parag Gupta, equity analyst at Morgan Stanley India, said Reliance Jio will be a key beneficiary of the IUC rate cut due to its higher skew of outgoing off-net calls. In Q1 FY 2018 interconnect costs for Jio stood at Rs 21 billion.
CLSA said the reduction in IUC will hit Bharti Airtel’s EBITDA by 4 percent and Idea Cellular’s EBITDA by 7 percent.
Reliance Communications will benefit from lower IUC and see a 3 percent EBITDA boost. Reliance Jio will be the biggest beneficiary of this regulatory change and see over 20 percent boost, based on its current FY19 EBITDA estimates.
Baburajan K
