5G rollout improving metrics despite high debt levels

The latest round of auctions in August 2022 kick-started the roll-out of 5G services in the country. Over the last few months, the telcos have been rolling out 5G services across various cities. While the roll-outs have started, and customers are being upgraded to the 5G network, the same is being done at no additional cost as 5G-specific plans have not been launched yet. Moreover, 5G deployment will entail densification of network and close placement of radio antennas, with possible collocation on street furniture. While small cells are likely to be the first options to start with, these need fiber connectivity for efficient network coverage and delivery. Moreover, full-scale 5G deployment will entail densification of network, and thus sizeable investments in fiberization. India currently has around 35 percent of its towers fiberized. With relatively low penetration of fiber in India, expected CapEx of around ₹3 lakh crore would be needed over the next 4–5 years. Moreover, as several retail-based use cases are under development, it will take some time for 5G to reach the adequate level of penetration. To begin with, it will be more focused toward enterprise-based use cases. Thus, unlike 4G, ICRA expects the 5G roll-out to be more phased out and pocket-specific.

A few telecom operators have started rolling out 5G in select markets and as of now around 300 cities have started receiving 5G signals. There have been no 5G specific plans by the operators as of now and the focus has been on rolling out of the services. Thus, in the near to medium term, it is not expected that these will add to the ARPU of the telecom service providers till the time, there are use cases and adequate proliferation of 5G based handsets. Globally also there has been a steady penetration of 5G with China leading the way and even in the geographies which have seen 5G launch, the ARPU difference between existing plans and 5G is not sizeable.

The 5G spectrum auctions in August 2022 saw participation worth more than ₹1.5 lakh crore. All the existing operators, along with the new entrant, Adani Data Networks, participated in it to buy spectrum across the 700MHz, 800MHz, 900MHz, 1800MHz, 2100-MHz, 2500MHz, 3300–3600MHz and 26GHz bands. Participation was boosted by relaxed payment terms, leading to very low upfront payment requirements vis-à-vis the previous auctions. The telcos paid ₹17,875 crore as upfront payment for the auction.

This latest round of spectrum auction has added a sizeable deferred-spectrum debt to the books of telecom operators, and ICRA expects the industry debt to exceed ₹6.3 lakh crore by March 2023, with a marginal moderation, going forward. The industry’s debt levels are likely to remain unwieldy, exerting pressure on the debt coverage metrics, with debt/OPBDITA expected to cross 4.5 times and interest coverage to touch around 3.0 times in FY2023, before debt/OPBDITA improves to around 4.0 times in FY2024.

On the other hand, the industry has continued to report healthy improvement in its operating metrics, as reflected by improvement in the ARPU levels and consistent growth in telephony usage. The telecom operators implemented a round of tariff hikes in Q3 FY2022, which, coupled with consistent upgradation of subscribers to 4G from 2G, resulted in improvement in the industry ARPU (excluding BSNL) to more than ₹170 for H1 FY2023 and the same is expected to cross ₹180 by the end of this fiscal, followed by an improvement to close to ₹200 by FY2024. The industry is expected to report a growth of 13–15 percent in its operating income in FY2023, which will translate into OPBDITA expansion by 18–20 percent. Industry consolidated revenues are expected to be around ₹2.6–2.7 lakh crore with an OPBDITA of around ₹1.3–1.4 lakh crore for FY2023. The revenue and OPBDITA growth thereafter will be governed by the next round of tariff hikes and upgradation of technology to 5G, along with growth in non-telco businesses.

The elevated debt levels have also exerted pressure on the telecom vendors. While the cash flow position of the telecom services industry has been improving, the tower industry has been feeling the heat in terms of elongated receivables cycles. Delay in payments by some weaker telcos to tower companies has led to an increase in receivable levels. The elongated working capital cycle is weighing down on the liquidity of the tower companies. These companies have taken a sizeable provisioning of the older and doubtful receivables over the last two to three quarters, and have also come up with various steps to clear these receivables. Some of the tower companies had allowed lenient payment terms till December 2022, followed by 100 percent of the payments starting January 2023. For the overdue amounts till December 2022, one tower company had devised a structured payment plan, while for another tower company, there was a proposal to convert the dues to optionally convertible debentures. In case these payments are not received, or there is a laxity in receipts, there will be an impact on the liquidity and profitability of tower companies, along with weak prospects of tenancy additions going forward. The payments have not been received as per the payment terms in January 2023 and the tower companies have to take sizeable provisions and asset impairment as well as delay/modify the revenue recognition towards the asset base of the telcos which are delaying these payments.

Over the years, the telecom sector has contributed significantly to the non-tax receipts of Government of India. There have been spikes in the years, which have witnessed spectrum auctions, where there has been a requirement of upfront payments. Further, FY2020 witnessed upfront payments made by a few telcos in relation to the AGR penalty, resulting in elevated receipts from the sector, while FY2022 witnessed pre-payments of deferred-spectrum liabilities by BAL and RJIL. In terms of individual components, license fee and spectrum usage charges, a regular feature every year, have recorded an increasing trend over the last few years. With a moratorium on payment of deferred liabilities, the auction payments have been low. For FY2023, it is estimated that the government collections from the telecom sector are around ₹50,000 crore, followed by expectations of ₹40,000 crore for FY2024. The revised estimate (RE) of non-tax revenues from communication services for FY2023 stood at around Rs. 68,700 crore, higher than the budget estimate (BE) of Rs. 52,800 crore. Moreover, the BE for FY2024 stands at Rs. 89,500 crore, which is higher than ICRA estimates, and likely assumes another spectrum auction in the next fiscal. Furthermore, the government has budgeted infusion of Rs. 53,000 crore in Bharat Sanchar Nigam Limited BSNL in FY2024, primarily for 4G spectrum, technology upgrading and restructuring.

The FY2024 budget emphasised the importance of creating a robust digital infrastructure, including e-learning, digital health, digital services to farmers, etc. Proliferation of these services to under-penetrated markets augurs well for the Digital India program of the Government of India. In addition, the budget also allocated funds for improving the socio-economic conditions of particularly vulnerable tribal groups, including telecom connectivity. These measures are thus likely to result in increased usage of telecom services and revenue generation for telcos. This budget also envisages setting up of three centres of excellence for Artificial Intelligence for conducting research and developing applications in the areas of agriculture, health, and sustainable cities. This apart, the announcement of setting up of 100 labs for indigenous development of 5G based use cases to develop applications around smart classrooms, precision farming, health care, etc. opens up a range of opportunities and business models for the incumbents.

While in the core telecom business, technology upgradation to 5G is likely to drive growth going forward, along with the upgradation of a large pool of subscribers to higher technology, the non-telco businesses – which include enterprise business, cloud services, digital services and fixed broadband services – will also remain crucial for chartering a growth path for the industry. The core business is experiencing consistent improvement in operating metrics; however, the debt levels continue to remain elevated, thereby leading to moderation in the credit metrics of the industry.