Tariff hikes to propel ARPU growth in current fiscal

The financial year ended March 2024 can be safely attributed as the year of 5G expansion. Telcos expanded their 5G footprint after the 5G spectrum auctions held in August 2022. While CapEx intensity increased post the 5G rollout, which has been upfronted ahead of the ecosystem, the monetization of the same appears protracted. This, coupled with the absence of any tariff hikes, resulted in moderated growth in the last fiscal. ICRA expects the telecom services industry to report a revenue growth of around 7–9 percent in FY2024 over FY2023 owing to muted average revenue per user (ARPU) expansion in the absence of tariff hikes. The revenues are likely to touch Rs. 2.9 lakh crore for the three private telcos taken together for FY2024, with operating profits (OPBDITA) of around Rs. 1.5 lakh crore.

While the elevated CapEx intensity is likely to continue in FY2025 as well, the revenue and OPBDITA growth will be triggered by the next round of tariff hikes, which are likely to be implemented by the telcos in the current fiscal. The ARPUs for FY2024 are likely be around Rs. 184 for the private telcos and the same are likely to improve to more than Rs. 200 for FY2025. ICRA expects the revenues to grow by 10–12 percent to around Rs. 3.3 lakh crore with OPBDITA expanding to around Rs. 1.7 lakh crore for FY2025. The growth thereafter is anticipated to be led by the monetisation of 5G services, along with growth in the non-telco business.

The roll-out of 5G services entails densification of the network and sizeable deployment of fiber, which is likely to keep the CapEx intensity elevated in the near to medium term. ICRA expects the major telcos to front-load the 5G-related CapEx till FY2025, causing the CapEx intensity to peak during this period and moderate thereafter. While a few telcos are likely to be instrumental in this upfronted CapEx, others will be incurring this 5G CapEx steadily, post the funding tie-ups and conclusion of the proposed fund-raising exercises. ICRA foresees the industry to spend around Rs. 3 lakh crore over the next 4–5 years. While there has been a roll-out of 5G network with more than 430,000 5G sites being deployed as on March 31, 2024, there are no retail-based use cases, which could compel the users to upgrade their handsets to 5G.

The next round of spectrum auctions is also proposed in H1 FY2025, in which a total of 10,523 MHz of spectrum across eight bands will be put to auction, which is valued at around Rs. 96,000 crore at the reserve price. However, ICRA does not expect telcos to aggressively participate in this spectrum auction. It is likely that the participation will be to the tune of renewals of the expiring spectrum and ICRA expects the spectrum to fetch around Rs. 7000 crore to Rs 10,000 crore to the exchequer, translating into annual pay-outs of Rs. 690 crore to Rs 980 crore for the telcos.

Thus, with this CapEx, ICRA expects the total debt levels of the industry to remain unwieldy at around Rs. 6.3 lakh crore as on March 31, 2024, with a slight moderation to Rs. 6.1 lakh crore as on March 31, 2025. While the increase in deferred spectrum debt resulted in a moderation in debt metrics in FY2023, the debt/OPBDITA is subsequently estimated to improve to ~4.3 times and interest coverage to ~2.9 times for FY2024. ICRA expects these metrics to improve further with debt/OPBDITA of around 3.5–3.7 times and interest coverage of around 3.0–3.1 times for FY2025 with moderation in debt and improvement in profitability.

The next phase of growth might kick in for the telcos once more subscribers join the 5G bandwagon, and they can monetize this by releasing 5G-specific plans. Moreover, the next round of tariff hikes will also provide a fillip to the industry ARPU and the profitability and return metrics of the telcos. Parallelly, increasing diversification by way of higher revenue share from enterprise business, digital services, fixed broadband services, cloud services, data centres, etc. are likely to foster future growth.

In the tower industry arena, there have been a few transactions in the last few quarters, resulting in industry consolidation with the likely emergence of two large players (Data Infrastructure Trust and Indus Towers) having more than 450,000 towers combined (if the ongoing transactions go through). ICRA had revised the outlook on the telecom tower industry to negative from stable earlier this year as the industry was facing headwinds in the form of elongated receivables, on account of delays in payments by some of the service providers, thus leading to moderation in the liquidity profile of the telecom tower industry and increased reliance on external debts. The situation is likely to improve, post the conclusion of fund-raising program of one of the major service providers.