Connect with us


Earnings growth to be muted in FY24 amid high CapEx spends

ICRA expects the telecom services industry to report a moderate revenue growth of around 7–9 percent in FY24 over FY23, owing to muted average revenue per user (ARPU) expansion in the absence of tariff hikes in the near term. 5G network deployment has picked up pace in the recent past, and the telcos have been expanding their 5G services in select pockets, as estimated by ICRA earlier. The roll-out entails densification of the network and sizeable deployment of fiber, which is likely to increase the CapEx intensity in the near to medium term.This would keep debt levels elevated at around Rs. 6.2–6.3 lakh crore as on March 2024 (Rs. 6.4 lakh crore as on March 31, 2023).

The three telcos together have achieved almost 75–80 percent penetration of 4G subscribers (around 800 million 4G subscribers), and thus the upgradation of subscribers has largely plateaued. Moreover, the 5G services launched by the telcos have not been monetized and there are no 5G-specific plans, which could otherwise have boosted ARPU levels. These factors, combined with the absence of tariff hikes, are likely to result in a moderation in ARPU growth. ICRA expects industry ARPU to improve to Rs. 182–185 for FY24 from Rs. 175 in FY23. Consequently, the industry is expected to report a year-on-year (YoY) revenue growth of 7–9 percent in FY24, translating into OPBDITA expansion by 9–11 percent vis-a-vis FY23, given the operating leverage. Industry consolidated revenues are expected at around Rs. 2.9–3.0 lakh crore with OPBDITA of around Rs. 1.5–1.6 lakh crore for FY24. The revenue and OPBDITA growth thereafter is anticipated to be led by the next round of tariff hikes and monetization of 5G services, along with growth in the non-telco business.

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, no 5G-specific plans have been launched yet, which could be ARPU-accretive. 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. India currently has around 35–38 percent of its towers fiberized. With relatively low penetration of fiber in India, the expected CapEx of around Rs. 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.

Thus, in the near to medium term, it is not expected that 5G will add materially to the ARPU of the telecom service providers till the time there are ample retail-based use cases and adequate proliferation of 5G-based affordable 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 industry has been upfronting 5G CapEx and thus ICRA expects material front loading of CapEx in FY24 and FY25, causing the CapEx intensity to peak during this period and moderate thereafter. ICRA foresees industry CapEx at around Rs. 70,000 crore for FY24 within an overall spend of around Rs. 3 lakh crore over the next 4–5 years. Accordingly, ICRA expects the total debt levels of the industry to remain unwieldy at around Rs. 6.2–6.3 lakh crore as on March 31, 2024. The last round of spectrum auction added a sizeable deferred spectrum debt to the books of the telecom operators, and the industry debt increased to Rs. 6.4 lakh crore as on March 31, 2023. The increase in deferred spectrum debt resulted in some moderation in metrics in FY23, with debt/OPBDITA weakening to 4.7× and interest coverage to 2.9×. These metrics are expected to subsequently improve for FY2025 with debt/OPBDITA improving to ~3.6× and interest coverage to ~3.1×, with steady uptick in operating metrics even as the debt levels remain high.

The FY24 budget emphasized 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 the increased usage of telecom services and revenue generation for telcos. This budget also envisages setting up of three centers of excellence for artificial intelligence (AI) 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, healthcare, etc., opens up a range of opportunities and business models for the incumbents.

The next phase of growth might kick in for the telcos once more subscribers join the 5G bandwagon, and telcos monetize this by releasing 5G-specific plans. Simultaneously, increasing diversification by way of higher revenue share from enterprise business, digital services, fixed broadband services, cloud services, data centers, etc., is likely to foster future growth.

Click to comment

You must be logged in to post a comment Login

Leave a Reply

error: Content is protected !!