Despite increase in debt levels, industry on a stronger footing with improvement in operating metrics

The telecom industry has been treading the steady path to recovery. The tariff hikes implemented by the industry participants, coupled with consistent upgradation of subscribers to 4G from 2G and increase in usage of telephony services, are expected to result in improvement in industry average revenue per user (ARPU) (excluding BSNL) to around ₹170 for FY2023, translating into growth in industry operating income by around 12–14 percent and operating profits by around 17–19 percent in FY2023, given the operating leverage.

The Indian telecom services industry is on the brink of a technology upgrade to 5G and the telcos, and in the recently-concluded auctions, bought spectrum worth ₹1.5 lakh crore, primarily toward developing 5G capabilities, coupled with plugging other gaps. While the upfront payment was low, owing to the elongated payment plan, the total debt on the industry is likely to increase, which will keep the debt metrics subdued, even as the operating metrics improve.

There has been a consistent improvement in the industry adjusted gross revenue (AGR), which improved to around ₹49,000 crore for the quarter ending June 2022, indicating a 20-percent YoY growth, which is likely to continue in the medium term, driven by increasing usage and addition of 4G subscribers. Proliferation of cheaper smartphones, coupled with relatively low data tariffs, despite the tariff hikes, also aids conversion of subscribers to 4G. These factors have placed India in the list of countries with one of the highest data consumptions per subscriber per month to more than 15 GB, next only to the Gulf countries. Moreover, these have translated into consistent ARPU improvement for the industry, which is likely to increase to around ₹170 for FY2023 from ₹147 for FY2022.

The operating margins of the industry witnessed an improvement to 48 percent in FY2022 from 44 percent in FY2021, driven by improvement in the ARPU as well as a reduction in inter-connect usage charges. Going forward, the increase in the ARPU, and reduction in spectrum usage charges in the latest round of auctions, will support a margin upliftment. This will also assist in improvement in return on capital employed to around 8 percent for FY2023, despite the 5G spectrum addition.

The recently-concluded 5G auctions witnessed healthy participation, with the industry spending around ₹150,170 crore, for spectrum across the 3300MHz, 26GHz, 700MHz and 1800MHz bands, along with small purchases in the 800MHz, 900MHz, 2100MHz, and 2500MHz bands, while there was no participation in the 600MHz and 2300MHz bands. While the 3300MHz and 26GHz bands will be crucial for 5G technology deployment going forward, the appetite for 1800MHz band stems from the rising mobile broadband usage and the need for improving network capacity.

Further, the 700MHz band, which went unsold in the last two auctions, witnessed participation, wherein RJIL bought 10 MHz across all 22 circles. Reliance Jio (RJIL) was the most aggressive bidder, acquiring spectrum worth more than ₹88,078 crore, followed by Bharti Airtel (BAL) at ₹43,084 crore, Vodafone Idea (VIL) at around ₹18,799 crore, and Adani Data Networks at ₹212 crore.

As per the payment terms for this auction, the amount will take the form of a 20-year deferred spectrum debt at a 7.2 percent interest rate. However, BAL paid four years of payments upfront, thereby taking the government collections to ₹18,000 crore from this auction for FY2023.

Overall, the non-tax receipts for the government from the telecom sector are likely to be around ₹50,000 crore for FY2023, including license fee, spectrum usage charges, and auction instalments.

‘Alongwith relaxed payment terms of the auctions, the CapEx for the roll-out is also likely to be phased out, thereby easing the cash-flow pressures on the industry.’

While the upfront payment is low, the spectrum auction has added a significant amount of deferred spectrum liabilities to the total debt of the industry, which continues to remain a vulnerable point for the industry. ICRA expects industry debt levels to increase to around ₹6.0 lakh crore as on March 31, 2023, before moderating to ₹5.6 lakh crore as on March 31, 2025. Telcos have been focusing on deleveraging – Bharti Airtel Limited concluded its first call of the rights issue of ₹21,000 crore and collected 25 percent as upfront payment in October 2021, while Vodafone Idea is also scouting for a fund-raiser.

While the debt levels remained unwieldy, exerting pressure on the debt-coverage metrics, ICRA expects the debt metrics to improve steadily going forward, given its expectations of improved profit generation. The total debt/OPBDITA is expected to increase to 4.6x for FY2023 with the addition of deferred spectrum liabilities, before moderating to around 3.6x by FY2025, while the interest coverage is likely to improve to 3.1x for FY2025.

The 5G roll-out will require a sizeable degree of fiberization as India currently has around 30–35 percent of its towers fiberized. However, ICRA thinks the telecom operators are unlikely to carpet-bomb the roll-out across the country and it will be more pocket-specific to areas, which will yield healthy returns and subscriber additions.

Thus, along with relaxed payment terms of the auctions, the CapEx for the roll-out is also likely to be phased out, thereby easing the cash-flow pressures on the industry. Furthermore, since several use cases are under development, it will take some time for 5G to reach adequate levels of penetration and to begin with, it will be more focused toward enterprise-based use cases.

Also, for roll-outs, small cells and in-building solutions along with dense network of fiberized towers will aid in a robust network.

While in the core business, a technology upgrade to 5G is likely to drive the 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.

Currently, the telcos have a portion of revenues coming from non-telco businesses, viz., enterprise business, home broadband, etc., which is likely to expand with the addition/expansion of domains like adtech, payment banks, data centers, etc.