The Indian telecom services industry is on the brink of technology upgrade to 5G. The Department of Telecom, in its notice inviting applications for the upcoming spectrum, has allocated a sizeable spectrum to be put to auctions across various spectrum bands whose value, at reserve price, is around `4.5 lakh crore. While operators are citing high reserve prices for the spectrum, ICRA expects telcos to buy spectrum worth around `1.0–1.1 lakh crore in these auctions, which will be primarily toward developing 5G capabilities and plugging other gaps. While the upfront payment is likely to remain low, an elongated payment plan has been recommended; the total debt on the industry is likely to increase, which is likely to keep the debt metrics subdued.
The TRAI recommended the auction of a sizeable spectrum across various bands, including new bands – 600 MHz, 3300–3600 MHz and 24.25–28.5 GHz. The 700 MHz band remained completely unsold in the last two auctions and the prices of the same have been successively reduced. Similarly, for 3300–3600 MHz band, the prices have been reduced from the last recommended price. However, despite the said reduction, the prices remain elevated and the industry has cited the need for a further correction. The TRAI has also come out with recommendations of relaxed payment terms, which allow telcos to pay for the spectrum in 20 equated annual instalments, thus ensuring very low upfront payment. This helps the liquidity position and is also likely to boost participation. This is the basis for ICRA’s assumption of the participation in the upcoming spectrum auction to be around `1.0–1.1 lakh crore, in which the upfront payment is likely to be close to `10,000 crore only. Adding this to the existing payments, the industry needs to shell out only `17,000 crore annually till the moratorium ends.
While the upfront payment will be low, the participation will lead to addition in deferred spectrum liabilities and thus in total debt of the industry. Debt continues to remain the Achilles’ heel of the industry. ICRA expects the industry debt levels to increase to around `5.7 lakh crore as on March 31, 2023, before moderating to `5.3 lakh crore as on March 31, 2025. Telcos have been focusing on deleveraging, and Bharti Airtel Limited recently concluded its rights issue of `21,000 crore and collected 25 percent as upfront payment, while Vodafone Idea Limited is also scouting for a fund raiser; however, addition of deferred liabilities continues to keep the debt levels elevated.
The telecom industry implemented a round of tariff hikes in Q3 FY2022, which, 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 (excluding BSNL) to around `170 by the end of FY2023. The industry is expected to report a growth of 10–12 percent in its operating income in FY2023, which will translate into OPBDITA expansion by 15–18 percent. Industry consolidated revenues are expected to be around `2.6–2.7 lakh crore with OPBDITA of around `1.2–1.3 lakh crore for FY2023. These are likely to translate into a ROCE of around 9–10 percent for FY2023 for the industry.
While the debt levels remained unwieldy, exerting pressure on the debt-coverage metrics, which remained depressed, with the expectations of improvement in profit generation, ICRA expects the debt metrics to improve steadily going forward. Total debt/OPBDITA is expected to increase to 4.5 times for FY2024 with the addition of deferred spectrum liabilities, before moderating to 4 times by FY2025, while the interest coverage is likely to improve to 2.8 times for FY2023 and further to 3.3 times for FY2025. While in the core business, 5G is likely to drive the growth going forward, the non-telco businesses, which include enterprise business, cloud services, digital services, and fixed-broadband services, will also remain crucial for chartering a growth path for the industry.