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Telecom
India
Potential termination rate cut and its impact. Some leading dailies report that TRAI
has submitted a proposal to the Supreme Court stating its intent to reduce termination
rate (MTR) to 10p/min from January 1, 2012 and to nil from 2014 (from 20p/min
currently). Direct impact of MTR cut is only marginally negative for incumbents. Impact
can be more pronounced if some of the challengers decide to pass on savings from
MTR cut to the consumers in the form of lower tariffs – this could translate into lowerthan-
forecast RPMs. We believe challengers would choose to retain the savings from an
MTR cut, if it happens. Remain positive on the incumbents Bharti and Idea.
News flow – TRAI proposes a two-step reduction in MTR to zero by 2014
Press reports indicate that the Telecom Regulatory Authority of India (TRAI) has submitted a
proposal to the Supreme Court stating its intent to cut MTR to zero in two steps – (1) to 10p/min
from January 1, 2012 from the current 20p/min, and (2) to zero from 2014. The Supreme Court
had directed TRAI to submit a proposal on interconnect charges following TRAI’s petition on a
TDSAT order pertaining to the last interconnect recommendations by TRAI (in March 2009). We
note that the TRAI has initiated a separate interconnect review process in the interim (December
2010). Industry participants are polarized on this issue – the incumbents are against an MTR cut
(they are in fact demanding an MTR increase) while the challengers are in favor of a cut. The
polarization is for good reason, as we discuss below.
MTR cut makes challengers more competitive in addition to providing direct cost savings
MTR, regulated in India, reflects the amount a call terminating network charges the call originating
network as compensation for terminating the call. India has a calling party pays (CPP) regime and
hence, revenues from a call accrue to the originating network. Now, in case of an off-net call (call
made to a subscriber with some other provider), the termination leg of the call is carried on the
network of the recipient’s service provider. In the CPP regime, the recipient does not pay anything;
hence, the recipient’s service provider is compensated by the caller’s service provider through
payment of what is called termination charge. Termination rates are regulated and fall under the
purview of the TRAI.
At a direct level, change in MTR impacts (1) the termination revenues an operator earns on off-net
incoming calls and (2) termination charges that an operator pays on off-net outgoing calls. Net
impact of a change in MTR depends on whether an operator is a net termination revenue earner
or payer. GSM incumbents are net earners, even as the amount is not substantial. More
importantly, the smaller players are typically net termination payers and the net termination
charges can form a substantial portion of cost structure of a small player (in % terms, given the
small revenue base). In addition, challengers need to be competitive on their off-net rates versus
incumbents’ on-net rates – this is where a cut in termination rates makes the challengers more
competitive; hence the polarization in view of incumbents versus challengers.
Impact – marginal unless the challengers use the savings to trigger another price war
We present the ‘no pass-through’ and ‘with pass-through’ impact of a 10p/min MTR cut on Bharti
and Idea in Exhibits 2-5; Exhibit 1 presents the impact of MTR cut on various types of minutes an
operator carries. No pass-through FY2013E EBITDA/ EPS impact is 0.6/1.2% for Bharti and 0.7/2%
for Idea. ‘With pass-through’ FY2013E EBITDA/ EPS impact (assuming 50% of the MTR cut is
passed on, an aggressive assumption) is 7.6/16% on Bharti and 17/51% on Idea.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Potential termination rate cut and its impact. Some leading dailies report that TRAI
has submitted a proposal to the Supreme Court stating its intent to reduce termination
rate (MTR) to 10p/min from January 1, 2012 and to nil from 2014 (from 20p/min
currently). Direct impact of MTR cut is only marginally negative for incumbents. Impact
can be more pronounced if some of the challengers decide to pass on savings from
MTR cut to the consumers in the form of lower tariffs – this could translate into lowerthan-
forecast RPMs. We believe challengers would choose to retain the savings from an
MTR cut, if it happens. Remain positive on the incumbents Bharti and Idea.
News flow – TRAI proposes a two-step reduction in MTR to zero by 2014
Press reports indicate that the Telecom Regulatory Authority of India (TRAI) has submitted a
proposal to the Supreme Court stating its intent to cut MTR to zero in two steps – (1) to 10p/min
from January 1, 2012 from the current 20p/min, and (2) to zero from 2014. The Supreme Court
had directed TRAI to submit a proposal on interconnect charges following TRAI’s petition on a
TDSAT order pertaining to the last interconnect recommendations by TRAI (in March 2009). We
note that the TRAI has initiated a separate interconnect review process in the interim (December
2010). Industry participants are polarized on this issue – the incumbents are against an MTR cut
(they are in fact demanding an MTR increase) while the challengers are in favor of a cut. The
polarization is for good reason, as we discuss below.
MTR cut makes challengers more competitive in addition to providing direct cost savings
MTR, regulated in India, reflects the amount a call terminating network charges the call originating
network as compensation for terminating the call. India has a calling party pays (CPP) regime and
hence, revenues from a call accrue to the originating network. Now, in case of an off-net call (call
made to a subscriber with some other provider), the termination leg of the call is carried on the
network of the recipient’s service provider. In the CPP regime, the recipient does not pay anything;
hence, the recipient’s service provider is compensated by the caller’s service provider through
payment of what is called termination charge. Termination rates are regulated and fall under the
purview of the TRAI.
At a direct level, change in MTR impacts (1) the termination revenues an operator earns on off-net
incoming calls and (2) termination charges that an operator pays on off-net outgoing calls. Net
impact of a change in MTR depends on whether an operator is a net termination revenue earner
or payer. GSM incumbents are net earners, even as the amount is not substantial. More
importantly, the smaller players are typically net termination payers and the net termination
charges can form a substantial portion of cost structure of a small player (in % terms, given the
small revenue base). In addition, challengers need to be competitive on their off-net rates versus
incumbents’ on-net rates – this is where a cut in termination rates makes the challengers more
competitive; hence the polarization in view of incumbents versus challengers.
Impact – marginal unless the challengers use the savings to trigger another price war
We present the ‘no pass-through’ and ‘with pass-through’ impact of a 10p/min MTR cut on Bharti
and Idea in Exhibits 2-5; Exhibit 1 presents the impact of MTR cut on various types of minutes an
operator carries. No pass-through FY2013E EBITDA/ EPS impact is 0.6/1.2% for Bharti and 0.7/2%
for Idea. ‘With pass-through’ FY2013E EBITDA/ EPS impact (assuming 50% of the MTR cut is
passed on, an aggressive assumption) is 7.6/16% on Bharti and 17/51% on Idea.
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