Cellular shares are not likely to drop on the back of the interconnect cut, but a spill-over into retail rates could concern the market.
Last week, communications minister Siphiwe Nyanda said the Department of Communications and the operators had come to a decision to cut peak interconnect rates by 36c by February next year. MTN has been given an additional month to implement its rate cut and will introduce the 89c peak rate in March.
Analysts say the rate will have already impacted share prices, with the stocks being discounted to allow for the initially mooted 60c cut. In addition, the interconnect cut is unlikely to affect operators' bottom lines immediately, as it is not a material cut.
This morning, Vodacom was trading 0.68% lower, at R55.62, after opening at R56. Its peer, MTN, was trading 0.35% up, at R120.22, after opening at R120.
Irnest Kaplan, MD of Kaplan Equity Analysts, says the net impact is between R200 million and R500 million a year, which is small when compared to the operators' profits.
Kaplan says Vodacom would be more affected than MTN, as the bulk of its business is based in SA, compared to MTN, which earns about a quarter of its revenue locally. “It's not very material,” he adds.
He explains that the companies not only receive interconnect fees, but also pay these out, which limits the net effect.
Pressure ahead
However, Kaplan says mobile operators could come under further pressure from government and the public to trim retail rates beyond any impact the interconnect cut may have.
He says this could potentially have a bigger effect on the cellular companies, and put their bottom lines under pressure.
The public's minds are focused on call rates, and when the interconnect cut does not result in the expected Christmas present, the public could call on operators to push rates down further, Kaplan explains.
Frost & Sullivan ICT industry analyst Spiwe Chireka says MTN and Vodacom have indicated the interconnect rate will keep coming down in a phased manner until it reaches 60c a minute.
She says the initial cut was a welcome move, but the rate could not immediately be slashed as “these guys still have to do business”.
Chireka explains that interconnect makes up about 60% of the per minute call rate. As a result, the cut will spill over into the retail cost, which will put the mobile operators' margins under pressure.
She says the operators could mitigate this margin pressure. Some strategies they could use include setting up joint venture companies to house infrastructure such as towers, which would aid in trimming costs and boosting margins. However, “overall, margins could be affected”, Chireka says.
Chris Gilmour, an analyst with Absa Investments, says cellular companies could look elsewhere to make up the lost revenue from interconnect. In addition, companies could use the cut to bolster average revenue per user, which is under pressure as consumers are reluctant to move out of bundle during the economic crisis.
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