We have noticed two data points on 5G [moderation in 5G rollout by front-running countries, and completion of 65% of 5G rollout by Reliance Jio (RJio)], which form the basis of this report. The two data points increase our conviction that 5G rollout in India will likely decelerate FY25 onwards. This means CapEx intensity could normalise, and pave the way for much-awaited FCF generation by Indian telcos for the first time since CY10 – a hiatus of 13 years! This should be a big rerating catalyst for Indian telcos, in our view. Further, we have seen 5G adoption rates getting downgraded and telecom operators still struggling to monetise 5G despite initial customer adoption. We believe 5G will become popular with rise in use cases on the enterprise side, and development of an affiliated ecosystem. Until then, demand/need for the next level of technology will be muted, which will likely elongate the FCF generation period for telcos. We remain positive on Bharti Airtel (BUY) as we believe the company has been prudent on CapEx and outperformed peers on EBITDA growth.
We are now more convinced of CapEx intensity reduction for Indian telcos
In company communiques for the quarter ended Jun’23, we have noticed two data points that increase our conviction that 5G CapEx will likely decelerate FY25 onwards, while consensus remains worried that CapEx can continue to be elevated. The two data points are: 1) Reliance Industries said in its presentation that RJio has rolled out 5G on 115k towers (~690k 5G cells) and is ahead of schedule in this regard. These rollouts cover 65% of 5G scope, implying a planned 5G rollout on 175k towers by end-Dec’23, which will mark completion of initial 5G deployment. This is lower than our estimate (published in our 5G CapEx note – link) of 5G deployment on 195k towers for RJio by FY24E. 2) In H1CY23, Ericsson and Nokia have seen moderation in 5G deployment in front-running countries including the largest economy, US. As per Opensignal Jun’23 report (link), India is in sixth position globally in terms of 5G availability at 29.9%, and its nearest peers are the US, Singapore and Taiwan at 30-31%, marginally above India.
5G monetisation – Are global telcos struggling?
In QE Jun’23 earnings call, Mr. Borje Ekholm, CEO, Ericsson said ‘…we saw softening in other markets, primarily front-running 5G markets and that includes of course North America and that’s something that we have discussed with you before as well where we see the build-out pace being moderated, but we also see customer inventory levels being rebalanced…’ As per Nokia, Europe, a developed economy, has 5G mid-band penetration 40-50% lower compared to India. Ericsson has cut its 5G subs estimates by 400mn to 4.6bn globally by CY28, which represents ~50% of its subs base vs 55% earlier (link). Omdia said multiple factors have slowed the transition to 5G, including (link): 1) lower handset sales due to inflation, 2) poor network coverage, 3) low performance gain perception, 4) lack of 5G-specific applications, and 5) slow conversion of non-handsets (internet of things, connected laptops, wearables).
We believe reducing hype of new technology is not really bad news for telcos who have failed to monetise data traffic, while investments have remained elevated (thereby restricting stakeholder value creation). A stable (but good) technology will allow innovation in new use cases, and better monetisation of investments. 5G was launched with the hope of creating new avenues of revenue from enterprise applications, and high-end consumer applications, which are yet to reflect on revenue.
Our FCF generation thesis for Bharti is playing out well!
In our earlier note, we have highlighted that (link) our confidence in FCF generation emanates from the following factors: 1) India, at worst, will remain a 3-private-player market for the foreseeable future limiting competitive intensity; 2) telcos will keep playing with tariffs, but we expect industry revenues to grow at least 10% p.a. for the next few years as operators focus on FCF generation vs market share in prepaid 4G / 5G segments; 3) network CapEx likely to peak in FY24E, and progressively reduce as 5G coverage layer reaches ~75% of the population; 4) spectrum investment is likely to be limited; large spectrum renewal is expected only in CY30; and 5) next technology transition may be at least 7-8 years way.
Further, the key reason for CapEx is to create data capacity to support data usage growth. Our analysis suggests 5G spectrum purchased has increased the spectrum deployed by 1.5-2.2x and technology will allow data capacity increase by ~6x per site. This is also confirmed by Bharti in its Q1FY24 earnings call. Rural 4G networks are under-utilised which will support data usage growth. India has seen significant deceleration in data usage growth (on high base), and saturation of data usage/subs. 5G data capacity will support data usage growth for multiple years, which will likely cap capacity CapEx.