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The telecom bailout package is not a silver bullet

Recent government measures to destress Indian telecom have brought a lot of hope to the beleaguered sector. Reforms ranging from moratorium support to boosting foreign direct investment could go a long way in helping telecom operators. But a deep-dive reality check shows the challenge to lift the industry out of the doldrums could be much greater.

For one, high spectrum-related costs could still drag down revenues. Indian telecom firms shell out a staggering one-third of their revenues towards acquiring and holding airwaves, shows research by GSM Association. Even excluding spectrum usage charges, which the government has now abolished, spectrum is set to remain prohibitively expensive.

Sample this: the reserve price for airwaves in the frequency band that makes 5G possible stands at ₹492 crore per MHz, much higher than the auction-determined prices in countries. A Bharti Airtel statement to a parliamentary panel last year put these 5G prices at ₹7 crore per MHz in Austria, ₹35 crore per MHz in Australia and ₹70 crore per MHz in the UK.

Mobile tariffs can hardly offset these costs: India has among the lowest tariffs globally. While voice services are effectively free, data has hit rock bottom since Reliance Jio’s entry in 2016. One GB mobile data costs $0.68 in India on average, compared to $4.72 in South Korea, $3.33 in the US and $1.42 in the UK.

The recent reforms provide a temporary breather, but long-term sustainability will hinge on the government biting the bullet on its own steep statutory levies and operators being able to raise tariffs to economically viable levels.

Liquidity relief
The four-year moratorium on adjusted gross revenue and spectrum-related dues gives the debt-laden industry a cash flow respite worth ₹41,000 crore a year, shows research by Nomura. The liquidity support gives companies, especially Vodafone Idea (VI), the headroom to invest in network upgrades and raise appetite in the next spectrum auction.

The government has also given companies an option to convert the interest due at the end of the moratorium to equity, signalling willingness to take up a stake in VI if it fails to put its house in order by then. The moratorium also improves prospects for Bharti Airtel, whose tower arm Indus Towers has VI as a key client.

However, companies availing the moratorium will accrue greater interest (8-10%) on the deferred payments, further increasing the debt burden later. This means that while the industry gets breathing space for reforms, the moratorium may just, in effect, push back the liquidity crisis in the sector by four years.

Upward Revision
Paring debt needs operators to shore up revenues through tariffs. But the industry’s average revenue per user (ARPU), excluding interconnect usage and roaming settlement charges, fell to ₹74.88 a month in 2019, from ₹123 in 2015, the last pre-Jio year. Tariffs were hiked only last year, bringing the ARPU to ₹94.87. Data revenues have declined much more sharply, with average revenue per subscriber per GB declining from a high of ₹226.30 in 2015 to a meagre ₹10.93 in 2020.

A ₹1 increase in ARPU can add about ₹1,000 crore to the industry’s operating profits, a report by Crisil said last year. Industry growth can sustain only if the near-term monthly ARPU rises to around ₹200 a month, and eventually to ₹300, experts say.

The government has so far been reluctant in setting a floor for telecom tariffs. Given the current industry structure, a hike in tariffs is possible only if the industry collectively takes the plunge.

Vodafone turnaround
The telecom sector crisis has often centred around the distress of Vodafone Idea in recent years. The moratorium gives the company a $4.3-billion liquidity cushion, according to Investec Capital Services. Though the improved liquidity will help the operator remain afloat for now, its future depends on its ability to pare debt while making fresh investments towards 4G expansion and 5G roll-out.

As per Credit Suisse, Vodafone Idea needs to more than double its current monthly ARPU to about ₹240 by 2025-26 to repay dues to the government, assuming it is able to retain 260 million subscribers.

The government has shown its intent to maintain the current industry structure of three private operators and one state-owned operator. Vodafone Idea now has to convince investors and its subscribers about the possibility of a revival. Livemint

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