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Telcos set for an increased AGR and ARPU in FY23-26

After suffering through years of disruptions and consolidations, the telecom sector is showing good signs of growth in aggregate gross revenues (AGR) driven by ‘premiumisation’ – higher 4G conversions and more post-paid subscriptions.

The telecom sector’s AGR is expected to grow at a compounded annual growth rate (CAGR) at 12% between FY23-FY26. And, Bharti Airtel is expected to add more market share, say analysts.

“Bharti’s AGR market share is likely to jump 125 basis points in the same period (FY23-FY26) to 37.5%, and RJio’s by 110 basis points to 42.5%,” said a research report by ICICI Securities.

The signs are already visible from Q1FY24 performance of Airtel, as its AGR market share went up by 80 basis points.

“Bharti’s strong market share gains in B and C circles indicates traction on its rural expansion strategy,” said Jefferies as it expects sector revenues to grow at 11% CAGR over FY23-26 with market share gains for Bharti/Jio.

Vodafone Idea’s market share has already declined to an all-time low in Q1, and market share losses could accelerate further, says Jefferies as 5G becomes mainstream. The company has been unable to start rolling out 5G due to its heavy debt, unlike its peers who have aggressively rolling it out.

The era of tariff hikes
The industry AGR recorded an 8% growth in Q1 even as the sector has not seen any tariff hikes in the last 12 months. This was driven by subscriber additions, data monetisation and premiumisation – conversion from 2G to 4G and from prepaid to postpaid.

Going ahead, this trend will only add to AGR as well as ARPU growth. The average revenue per user (ARPU) is also expected to grow at a healthy pace of 10% over the next three years, estimates ICICI Securities. Moreover, there are tariff hikes to come.

“We believe India wireless business tariff hikes are likely to be more frequent, going forward, given the consolidated industry structure and higher ARPU requirement to justify significant capex for 5G rollout,” said a report by J M Financial.

In the last three years, the sector took two tariff hikes in December 2019 by around 25%, and another in December 2021 by around 15%. The companies were affected by the first tariff hike due to SIM consolidation, but the second hike smoothly flew into the AGR.

ICICI Securities too expects another tariff hike in FY25 which is expected to be at around 10%. But this is not the only factor that can contribute to ARPU growth. Over 6% CAGR growth is expected to come from premiumisation and data monetisation.

“Nonetheless, industry AGR performance in the past few quarters has shown organic growth (defined as AGR growth without tariff hike) can potentially sustain at much higher levels if operators execute better data monetisation,” ICICI Securities said.

And when tariff hikes happen, it will only add to market share gains to Airtel. “Bharti is the biggest beneficiary of higher tariffs given the sticky and premium quality of its subscribers, ensuring that tariff hikes flow through to ARPU,” says J M Financial.

In the near future, as 5G becomes mainstream, Airtel and Jio have more to gain, as 5G users are expected to consume more data — driving the sector towards more premiumisation. Business Insider

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