'Trai Call Drop Compensation Policy to Hit Telecom Operator Profits'

Telecom regulator Trai mandating compensating subscribers for up to three call drops in a day is likely to impact pre-tax profit of Bharti Airtel and Idea by up to 7-8 percent, leading brokerages said even as they expressed doubts over how the policy will be implemented.

Telecom regulator Trai last week mandated that telecom companies from January 1 should compensate users at the rate of at Re. 1 per dropped call, with a ceiling of three dropped calls per day (or Rs. 3 per day).

"The penalty structure is open to abuse. The average outgoing call rate for leading operators is in the range of Rs. 0.65-0.70 per min. Many customers are on per-second billing plans. "It is easy for an enterprising subscriber to earn up to five minutes of free calls every day by initiating a call and immediately removing the battery from the phone (or entering an elevator) thereby earning a Re. 1 account credit, and repeating this process two more times a day to stay under the three dropped calls daily limit," Credit Suisse said in a note.

Taking an average 4 percent call drop rate (close to the results of Trai's latest drive tests), it said the penalty could have about 3 percent hit on revenues and a 7-8 percent hit on mobile EBITDA for Bharti and Idea. Deutsche Bank Markets Research estimated that revenue and EBIDTA of Idea Cellular would be impacted by 2.5 percent and 3.7 percent, respectively, while the same for Bharti Airtel would be 1.5 percent and 2.1 percent.

It said the regulation is likely to introduce another layer of complexity to the operators' billing systems. Besides Trai has not specified any mechanism to audit the claims which are bound to arise in future.

HSBC Global Research said the fines imposed are 2.7-times of sector realisations on every minute of voice produced. "In our view, call drop is an outcome of poor spectrum policies, supported by the fact that Indian telcos are way below the global average on spectrum allocations," it said. Estimating Bharti's revenue being impacted by 4 per cent and EBITDA by 7 per cent, HSBC said there could be a case for tariff increase as the penalties would hurt players across the board.

Morgan Stanley asked how would Trai practically implement testing methodology for the call drop. Predicting that telcos may go to court against the penalty, Nomura said it isn't easy to determine the cause of call drops - whether it is due to limitations in the originating network, or in the terminating network; or due to some action by the subscriber, such as removing the battery or stepping into a low coverage area, such as a lift or a basement.

It estimated a 5 percent negative impact on EBITDA for Bharti's India wireless segment, and 3 percent on its consolidated EBITDA. For Idea, it estimated 6 percent downside.