The telecom industry has implemented the long-awaited tariff hikes which has the potential to improve the industry ARPU levels to around Rs. 170 by the end of FY2023. This will result in increased profit generation, which coupled with the relief package announced by the GoI, provides enough headroom for the industry to undertake deleveraging as well as fund capex for the technology upgrade to 5G. With these tailwinds, ICRA has revised its outlook on the telecom services industry to Stable from Negative.
According to Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Ratings, ICRA Limited, “The latest round of tariff hikes wherein the telcos increased the prepaid tariffs by around 20% will provide much- needed traction in the ARPU levels. These hikes coupled with consistent upgradation of subscribers to 4G from 2G and increase in usage of telephony services is expected to result in improvement in industry ARPU (excl. BSNL) to around Rs. 170 by the end of FY2023. We expect the industry revenues to grow by 18-20% in FY2023, followed by a growth of 10-12% in FY2024, which given the high operating leverage, is likely to translate in healthy expansion in operating profits, the same are projected to grow by around 30% in FY2023. These are likely to translate into a ROCE of around 10% for FY2023 for the industry.”
While the green-shoots of recovery in the sector were sprouting with steady improvement in ARPU, the tailwinds started in the last 3-4 months when the GoI announced a relief package and then telcos followed this up with tariff hikes. Under the relief package, GoI provided a moratorium on the AGR and spectrum auction dues for four years. As per ICRA calculations, this moratorium provides an annual cash flow breather of around Rs. 40,000 crore for the industry till FY2025. Moreover, the bank guarantee requirement for the telcos has also been slashed and the Department of Telecom has started returning the BGs to the telcos, which improves the financial flexibility of the sector. While the moratorium on the dues would impact the non-tax receipts of the government from telecom sector, two telcos have pre-paid their dues towards earlier spectrum auctions totalling to Rs. 26,300 crore thereby making up for the loss to the government. For FY2022, the telecom sector is expected to contribute to around Rs. 54,000 crore to GoI’s non tax receipts which will be close to the budgeted estimate for the fiscal.
Debt continues to remain the Achilles’ heel of the industry. ICRA expects industry debt levels to remain at around Rs. 4.7 lakh crore as on March 31, 2022, before moderating to Rs. 4.5 lakh crore as on March 31, 2023. Telcos have been focusing on deleveraging and Bharti Airtel Limited recently concluded its rights issue of Rs. 21,000 crore and collected 25% as upfront payment, while Vodafone Idea is also scouting for a fund raiser.
Ankit Jain, Assistant Vice President and Sector Head, ICRA Limited concludes: “The debt levels have remained unyielding for quite some time now and with the expectation of improvement in the profit generation after the latest tariff hikes, ICRA expects the debt metrics to improve as reflected by debt/OPBDITA of 3.4 times and interest coverage of 3.5 times as on March 31, 2023. The relief package provided the much-needed breather for the industry and the participants complemented the same with a tariff hike which coupled with equity raising plans would provide the ammunition required for the technology upgrade to 5G. While there has been an improvement in the operating metrics of the industry, the next phase of growth will be driven by the non-telco businesses, which include – enterprise business, cloud services, digital services and fixed broadband services.”