FY24 Telecom Outlook: Increased CapEx intensity to limit RoCE upside

India Ratings and Research (Ind-Ra) has maintained a neutral outlook on the Indian telecom sector for FY24. The agency expects the deployment of 5G at an accelerated pace by telecom companies (telcos) to increase the CapEx intensity in the sector for the next 12 months. With 5G not being offered at premium pricing currently, RoCE for telcos might see limited upside. Ind-Ra does not foresee broad-based tariff hikes materialising in the near to medium term, given the heightened competition amid telcos recent attempts to acquire high-average revenue per user (ARPU) customers and aggressive 5G roll-out plans. However, ARPU may continue to exhibit organic growth of around 5% yoy in FY24 due to likely indirect tariff hikes resulting from (a) pricing actions in low tariff bands and subsequent subscriber churn and (b) continued rising composition of data users.

Reliance Jio Infocomm Ltd (RJio; ‘IND AAA’/Stable) and Bharti Airtel Limited’s (BAL; debt rated at ‘IND A1+’) may continue to acquire market share from Vodafone Idea Limited (VIL), especially in the high-ARPU customer base.

The outlook for the telecom tower industry remains deteriorating, given its (a) dependency on liquidity-strapped VIL, (b) rising receivables, and (c) benefits of 5G roll-out being back-ended. Impact of delayed receivables on tower companies’ credit profile should be much worse, given their inability to delay fuel payments and lack of visibility on recoverability of pending dues (large provisioning done over the past one year). Continued CapEx intensity and aggressive dividend payout policies remain additional negatives. Indus Towers Limited has already written off about INR50 billion of receivables due from VIL (contributing over 40% to Indus Tower’s total revenue) in 9MFY23 and has collected only part of the recurring dues from VIL. Therefore, the ability of VIL to raise funding remains a key monitorable for tower companies.

The outlook for telecom equipment manufacturers is neutral, given the strong demand drivers (domestic and exports) and supportive regulatory environment (Production-linked Incentive (PLI) scheme). With only two to three years since announcement and implementation, while some players have already received PLI benefit for one year, a large portion of the benefit will be received in the coming years, which is expected to support their margin profile. While the benefit of PLI scheme is extended by the government till FY26, the ability of the companies availing this benefit to maintain their margin profile after FY26 remains to be seen. India Ratings